Introduction: Lord Pannick

—David Philip Pannick, Esquire, QC, having been created Baron Pannick, of Radlett in the County of Hertfordshire, for life, was introduced between the Lord Woolf and the Lord Lester of Herne Hill.

Death of a Member

Baroness Hayman: My Lords, I regret that I have to inform the House of the death of Lord Cuckney on 30 October. On behalf of the whole House, I extend our condolences to his family and friends.

Education: Adult Learning

Baroness Sharp of Guildford: asked Her Majesty's Government:
	When the results of their consultation on informal adult learning are expected.

Lord Young of Norwood Green: My Lords, we published the report of the consultation—I have it here—and the DIUS response on our website on Thursday 9 October. The DIUS has received around 5,500 responses. Its officials are developing and impact-assessing proposals arising from the consultation as the foundation for a new informal adult learning strategy to be published early next year, surely an appropriate time for a lengthier debate on such a vital issue.

Baroness Sharp of Guildford: My Lords, I thank the Minister for his Answer. I am grateful for the two-page response from the department to the 5,500 responses to the consultation. I have two questions for the Minister: first, will he confirm that the Government still believe, as they did in 1998 when they published The Learning Age, that continuing adult education has a catalytic value in achieving social and economic goals as well as being of intrinsic value in itself? If so, why are they transferring this year some £128 million from the adult learning budget to the higher education budget?
	Secondly, the department, in its response, made much play of so-called "self-organising adult learning"; namely, organisations such as the University of the Third Age. Without in any sense wishing to detract from the University of the Third Age, for which I have a great admiration, does the Minister think that such organisations attract into the system new learners rather than those who are already well learned?

A noble Lord: Yes or no.

Lord Young of Norwood Green: My Lords, I was just pondering how much of a multiple question that one was. We want to create national connections between government departments, whether it is the DCMS, the Department of Health, the Department for Children, Schools and Families, or those dealing with social mobility and a whole range of other factors. We believe in the catalytic value of informal adult learning to the nation as a whole. As for the £120 million to adult education, we maintain that our commitment to sustained funding with £210 million available every year until 2010-11 is genuine and important.
	I am sorry; as it was a multiple question, I missed the last point.

Baroness Whitaker: My Lords, is the Minister aware that, some time ago when I was in the employment department, the goal of using informal adult learning as a criterion for moving into work was desirable but elusive? There were many interests at stake. Does the Minister not agree that this is, in fact, a cross-governmental issue?

Lord Young of Norwood Green: My Lords, I absolutely agree with my noble friend that this is very much a cross-governmental issue. As I said in answer to the last point, we are already working with government departments, such as DCMS, Communities and Local Government, the Department of Health and the Department for Children, Schools and Families, which all have an interest in this area.

Baroness Verma: My Lords, if the Government recognise that there is a catalytic effect, why have they cut 1.5 million funded and part-funded adult learning places?

Lord Young of Norwood Green: My Lords, we do not agree with that figure. The accusation is based on the latest full-year statistical first release for 2006-07, and refers to the reduction in places across all Learning And Skills Council-funded further education provision for over-19s. This is not just about informal learning. With our funding, we are maintaining our commitment. Our moral for adult learning is "Quality, not quantity".

Baroness Howe of Idlicote: My Lords, I am sure that the Minister will understand why those of us who have been arguing for more money to be spent on adult education will feel disappointed by the number of places cut. Can he explain the future policy and, in particular, whether ICT will be taught to the older generation—not least if they are to be expected to go straight on to websites?

Lord Young of Norwood Green: My Lords, we must be careful that we are using the right figures when we talk about cuts. There has been talk of a 42 per cent cut, and we do not accept that figure. There will be a reduction by the end of the year by 14 per cent.
	We believe in IT as a means of delivery. To pick up on a point that the noble Baroness, Lady Sharp, made, traditional methods are not the only route to informal adult learning. People lead busy lives. It might be IT, or it might be one-off courses. The staggering increase in people interested in genealogy because of television programmes, for example, as well as readers' groups and book clubs, are all invaluable parts of informal adult learning.

Baroness Walmsley: My Lords, whether or not the Minister agrees with the figure of 1.5 million, will he at least confirm that the largest percentage drop, something like 55 per cent, is in engineering and manufacturing technologies? Does he agree with me that we really need extra adult education in those areas if we are to upskill the workforce?

Lord Young of Norwood Green: My Lords, we have shown our commitment to extra adult education in the recent Education and Skills Bill, on which we have had extensive debate. The Government do not need to apologise for their record of commitment to improving the skills set of the nation.

Lord Skelmersdale: My Lords, as the Minister does not agree with the figure of 1.5 million cuts, given by my noble friend on the Front Bench, what figure he has in his brief?

Lord Young of Norwood Green: My Lords, I shall have another go. Funding for adult skills is rising from £4.6 billion in 2007-08 to £5.3 billion in 2010-11. That is an increase of 7 per cent in real terms. It is expected to support an average of more than 3 million adult learners per year over the Comprehensive Spending Review period. We have moved away from funding lots of lower-quality courses to funding the ones that give people the best chances of employability and further progression.

Lord Jones of Birmingham: My Lords, given the success of the learning and skills councils when it comes to a major attack on a community such as the closure of Vauxhall at Luton or the closure of MG Rover at Longbridge in Birmingham, will the Minister explain why they are being replaced by local authorities, which will be politically motivated, rather than business-driven, which has been the key to previous success?

Lord Young of Norwood Green: My Lords, I was not aware that learning and skills councils were being replaced totally by local authorities. As I understand it, the Skills Funding Agency will be one of the groups, but I shall write to the noble Lord to give as accurate an answer as possible.

Nuclear Decommissioning Authority

Lord Jenkin of Roding: asked Her Majesty's Government:
	Whether the funds available to the Nuclear Decommissioning Authority are sufficient to enable it and its contractors to fulfil their programmes at Sellafield.

Lord Hunt of Kings Heath: My Lords, the Government are funding the largest ever amount of expenditure on the UK civil nuclear clean-up programme. This funding allows the Nuclear Decommissioning Authority to operate safely and effectively, in line with its priorities. Its top priority is tackling the risks at the most hazardous facilities, including those at Sellafield. The authority is satisfied that it has sufficient funds to enable it and its contractors to fulfil the priority programmes at Sellafield during 2008-09.

Lord Jenkin of Roding: My Lords, I certainly recognise that there have been increases in funding over the past two or three years, but does the Minister accept that uncertainty about future funding for what is, by its very nature, a long-term programme prejudices the ability of the NDA to plan its work in the most cost-effective way and, perhaps more importantly, impacts seriously on the supply chain's development of skills and employment?

Lord Hunt of Kings Heath: My Lords, I certainly agree that it is important that the NDA has certainty about funding. Its funding comes both from commercial operations and grant from the Exchequer. It plans to spend £2.9 billion this year and there are similar plans for 2009-10. As regards certainty for companies, I believe that the future is bright. In addition to the work related to nuclear decommissioning, the proposed take-over of British Energy by EDF and its proposals for new nuclear build suggest that, as a whole, this could be a very successful industry in the future.

Lord Teverson: My Lords, the estimated expenditure for decommissioning NDA sites from 2003-07 went up by an estimated 30 per cent to £73 billion. In the short term the estimate for decommissioning between 2008 and 2013 has gone up by 41 per cent. If we are so bad at estimating these costs, how can we guarantee that taxpayers will not land up paying for decommissioning of nuclear new build?

Lord Hunt of Kings Heath: My Lords, the noble Lord is being a little unfair about the estimates. He will know that one of the key purposes of setting up the Nuclear Decommissioning Authority was to ensure that we had much better estimates of the cost of decommissioning over the many years it is due to take place. The result of its efforts has been to update the cost. My understanding is that it is expected that while costs may still rise in the short term, using the competitive approach to bringing in companies to manage the decommissioning programme may well reduce costs in the long term. The noble Lord will know that the approval process has to be satisfied that the companies engaged in new build will be able to meet the decommissioning costs.

Lord Berkeley: My Lords—

Lord Campbell of Alloway: My Lords—

Baroness Royall of Blaisdon: My Lords, there is plenty of time. I think that it is the turn of the Labour Benches.

Lord Berkeley: My Lords, after all the decommissioning has been completed, where will the highly radioactive stuff end up? Will it be in a tank in Sellafield, with the waste having a half-life of 1,000 years, or do the Government have a better idea about where it might go?

Lord Hunt of Kings Heath: My Lords, my noble friend will probably know that the whole question of managing radioactive waste was discussed in a Defra White Paper in June 2008. Clearly, the preferred approach is for geological disposal. He will probably also know that the White Paper invited local communities to express an interest in opening up, without commitment, discussions with the Government on the possibility of hosting a geological disposal facility at some point in the future. My understanding is that one such community has already expressed interest.

Lord Campbell of Alloway: My Lords, the Question asks what funds are available. What funds are available?

Lord Hunt of Kings Heath: My Lords, I thought I had explained that to the House. This year, £2.9 billion is available, and the plan for 2009-10 is for £2.9 billion. The estimated liability over the many years of the decommissioning programme is £44 billion. That is the current estimate, but it may well change in the future. The hope is that, by bringing in expertise, the cost over the long term will come down.

Baroness Wilcox: My Lords, the Government state that,
	"operators of new nuclear power stations must ... meet the full costs of decommissioning ... and their full share of waste management and disposal costs".
	What is meant by "share"? Will the Minister assure the House that, with no exceptions, operators will cover the entire cost of dealing with waste from their facility for its entire lifetime?

Lord Hunt of Kings Heath: My Lords, those matters will be taken forward as the proposals for new build are made. A funded decommissioning programme would have to be submitted by a prospective nuclear power station operator prior to construction and it must be approved by the Secretary of State. That programme will require a decommissioning and waste management plan that describes the costed steps for both decommissioning and waste management and disposal.

Zimbabwe

Lord Blaker: asked Her Majesty's Government:
	What recent discussions they have had with the member countries of the Southern African Development Community about the future of Zimbabwe.

Lord Malloch-Brown: We are in regular contact with states in the region both directly and via our high commissions and embassies. The political deadlock in Zimbabwe is a tragedy for the people who voted for change in March. We hope that the forthcoming SADC summit will help Zimbabwean political leaders reach the solution that is fair and reflects the outcome of the 29 March elections.

Lord Blaker: My Lords, is the noble Lord aware that last week Donald Kaberuka, the president of the African Development Bank, said of the people negotiating for the future of Zimbabwe:
	"We are keen that they reach a political agreement so that they can have a credible economic reform programme and credible people at the Reserve Bank"?
	Does the Minister detect from that a recognition from within SADC of the sweeping changes of personnel of all kinds that will be necessary from almost every international organisation?

Lord Malloch-Brown: My Lords, I have had the opportunity to talk quite extensively with Donald Kaberuka, a remarkable individual who leads the African Development Bank. He is very well aware that ending the current situation of hyperinflation in Zimbabwe and restoring sensible economic policies require not just a new team but solid political will in government. At the moment, we are nowhere near achieving that.

Baroness D'Souza: My Lords, according to a report last week by Amnesty International, at least 180 people have been murdered and over 9,000 have been tortured since the election in March. What guarantees and sanctions were put in place by the SADC leaders who witnessed the power-sharing agreement in September?

Lord Malloch-Brown: My Lords, the whole international community shares with the noble Baroness a frustration that in all the weeks since the power-sharing agreement was signed in September, it still cannot be implemented, because of opposition by President Mugabe to the sharing of cabinet portfolios, which was called for in the agreement. The SADC negotiator spent four days in Harare last week without being able to break that deadlock. We expect there to be a SADC heads of government meeting of some kind next week, and we very much hope that it will resolve this issue before there is more economic hardship and loss of life.

Lord Anderson of Swansea: My Lords, does my noble friend agree that so much of the good in Africa is drowned out by the image of Mugabe's Zimbabwe? Does my noble friend detect in his contact with not only with the African Development Bank but also regional leaders a recognition that Mugabe, having destroyed his economy and killed so many of his people, is marring the image and investment opportunities of the region as a whole? If there is such recognition, what is being done about it?

Lord Malloch-Brown: My Lords, the leaders of the African region as a whole are in no doubt, in private conversations, about their dismay at the damage that President Mugabe is doing to his country and the region; but, as has always been the case, they often find it difficult to express that complaint publicly, for fear that it would merely strengthen Mugabe's position at home.

Lord Avebury: My Lords, it is good news that the SADC summit will be held in the near future under the chairmanship of President Motlanthe, who, after all, had direct personal experience of the situation in Zimbabwe when he was head of a COSATU delegation a couple of years ago. Will the summit be able to consider the complete breakdown of humanitarian efforts in Zimbabwe, which has arisen from a trillion per cent inflation rate, the regime's theft of $7.3 million from the Global Fund to Fight AIDS, Tuberculosis and Malaria, and other hindrances that have been imposed on international humanitarian efforts?

Lord Malloch-Brown: My Lords, as the noble Lord knows, it is a SADC summit and its members will choose what they choose to discuss, but the constraints on effective humanitarian assistance, because of the Zimbabwe regime's corruption, are evident. I am, however, pleased that the World Food Programme and other humanitarian agencies hope to increase the size of their feeding programmes—from 2 million to 5 million people, more than half of whom remain in Zimbabwe—in ways that the agencies hope will prevent any siphoning off of funds by this corrupt regime.

Lord Howell of Guildford: My Lords, amid the growing horror in Zimbabwe, is it not tragic that the currency is, in effect, dead, given that it apparently takes more than 40 billion Zimbabwean dollars to buy one American dollar? In other words, the currency is beyond recall. Will the Minister forgive me for returning to the point that I raised with him the other day about what is happening to UK hard currency aid to Zimbabwe? Are we sure that it is not being pilfered by the regime, and is this not a matter that we should raise with SADC to ensure that the money reaches the points it is meant to reach and is not simply siphoned off by this monstrous group who are driving Zimbabwe deep into the ground?

Lord Malloch-Brown: My Lords, I am happy to—I hope—reassure the noble Lord. I did, indeed, follow up on his previous question, because I am always worried that he may know something that I do not. In this case, the fact that our aid is overwhelmingly humanitarian and is provided through international agencies directly to NGOs, means that the possibility of money being siphoned off within the reserve bank is extremely limited and is, we hope, kept to a small minimum. More broadly, it is correct that the essential "dollarisation" of the economy means that the army and others increasingly seek their pay in dollars—requests that are becoming impossible for the regime to satisfy.

Democratic Republic of Congo

Lord Avebury: asked Her Majesty's Government:
	What measures they will support in the United Nations Security Council to deal with the recent upsurge in attacks by the rebel movement under Laurent Nkunda in the Democratic Republic of Congo, and threats to the safety of Ituri province by a new armed coalition, the Popular Front for Justice in the Congo.

Lord Malloch-Brown: My Lords, my right honourable friend the Foreign Secretary visited the Democratic Republic of Congo over the weekend. During this visit, he called for a strengthening of MONUC, the UN force, in North Kivu province. We are discussing with the UN and the countries that contribute troops to MONUC options for increasing its effectiveness. We are also carefully following events in Ituri province, including the launch of the Popular Front for Justice in the Congo.

Lord Avebury: My Lords, as MONUC is facing military attacks not only in the vicinity of Goma but on three other fronts, does it make sense to denude the MONUC forces of assistance in those other three provinces by transferring troops into Goma? Would it not be preferable to accept the proposal by the French presidency of an emergency force of 1,500 troops supplied by the European Union? Will the Government ask for a full meeting of the Security Council to mandate an increase in the MONUC forces, perhaps up to a level of 24,000 as originally envisaged by Kofi Annan, and to bring together the parties from the Nairobi accord and the Goma agreement with the support of the African Union?

Lord Malloch-Brown: My Lords, I think that MONUC troops deployed elsewhere in the country will provide by far the quickest solution to the immediate, short-term need to reinforce MONUC in North Kivu. In the longer term, the Department of Peacekeeping Operations at the UN will report to the Security Council later this month on what it considers to be the right size of force for the increasingly complex task that it faces. We will obviously seek an early debate on that because, if there is a need for MONUC enhancement, we want to address it as quickly as possible. As we have made clear, at this stage neither we nor the French think that a European force is the immediate solution, but prudence requires that we continue to look at the possibility of deploying such a force, should it become necessary.

Lord Clinton-Davis: My Lords, have there been discussions between the members of NATO about this issue? It is better to be prepared in advance rather than to react suddenly.

Lord Malloch-Brown: My Lords, in fact, there have now been some 21 missions of the European defence forces, which, rather than a NATO force, are more normally used for these kinds of activities. On Thursday, there was a meeting of the relevant committee in Brussels, and a two-day working session is now under way to plan and agree a contingency arrangement, should such a force be necessary.

Lord Hannay of Chiswick: My Lords, does the Minister not agree that the present situation in the eastern region of the DRC is a clear-cut case of the international community's responsibility to protect the civilian population, given that the DRC is not able to do so itself and that the sensitive problem of consent does not arise? Does he not also agree that recent events have shown the need for a large peacekeeping mission such as MONUC to have either its own rapid reaction capability or a multinational back-up force to deal with emergencies such as have now arisen?

Lord Malloch-Brown: My Lords, the noble Lord is doubly right in that the issue of consent does not apply, not least because the President of Congo himself has appealed for help, calling for a supplementation of the international forces there. Again, we have to remind ourselves that MONUC is the largest UN force anywhere in the world. It is currently overstretched, but first we need to look at ways in which we can enhance and strengthen it. The noble Lord's suggestion of giving it additional standby capability is very sensible.

Baroness Tonge: My Lords, does the Minister agree that, even if the present situation is dealt with and contained, the root causes of this problem have to be dealt with? One of those root causes is the huge mineral wealth to be found in east Congo, which everyone—especially Rwanda and allegedly Uganda—wants. Can he say what progress is being made with the G8-sponsored regulatory system for the extraction and export of these resources, which would ensure more revenue for the Congo and peace and stability in the region?

Lord Malloch-Brown: My Lords, one of the three pillars of DfID's development strategy in the Congo relates to transparency and honesty of resource extraction policies following that G8 commitment. More broadly, with a pattern of divided, tribalised, power-grabbing politics, the area has been a sandpit that has attracted every rogue natural resource operator in the world. However, the solution is better government to manage the mineral wealth better.

Lord Howell of Guildford: My Lords, will the Minister share with me this opportunity to salute the courage of the aid workers and truck drivers who are being asked to drive into dangerous rebel territory, obviously at considerable risk, however successful or otherwise the UN is at protecting them? They seem to be the unsung heroes of such situations. The Minister said that our troop contribution is being considered. Will he indicate what size of contingent the UK will contribute, if it goes ahead, and from where would we draw those troops?

Lord Malloch-Brown: My Lords, on the first point, I think that we all share the noble Lord's respect and gratitude for international and NGO humanitarian workers who, in recent years, have given their lives in even greater numbers than UN peacekeepers in conditions of this kind. On his second point, he will forgive me if I am not drawn too far down the road of a hypothetical deployment. I repeat that we very much hope that there will be a strengthened MONUC and a political solution to this problem. A UK deployment as part of a European force is something that we are holding in reserve. An EU brigade, which is more than 1,500 people, is on standby for such purposes and the UK would be one of the contributors.

Lord Avebury: My Lords, is one of the reasons why Laurent Nkunda refused to lay down his arms the failure to disarm the Hutu genocidalist FDLR? Will the Minister try to ensure that that ingredient is fed into any political solution by the Security Council and that there is an acceleration of FDLR disarmament and demobilisation?

Lord Malloch-Brown: My Lords, the noble Lord puts his finger on what we think is the core problem: the continuation of a Hutu militia—many of whose members were directly involved in the genocide of 1994—in the Congo as a military force, jeopardising the security of Rwanda. There can be no solution to the Tutsi militia of General Nkunda without addressing, first and foremost, the issue of the Hutu militia. There is a plan for doing so, but there has been a lack of political will, particularly in the Congo, to achieve that agreed demobilisation and reintegration of this group.

Police Appeals Tribunals Rules 2008

Police (Performance) Regulations 2008

Police (Conduct) Regulations 2008

Immigration and Nationality (Fees) (Amendment No. 3) Regulations 2008

International Criminal Court (Remand Time) Order 2008

Lord Brett: My Lords, I beg to move the five Motions in my name on the Order Paper.

Moved, That the draft rules, regulations and order laid before the House on 6 October be approved. 27th report from the Joint Committee on Statutory Instruments.Considered in Grand Committee on 29 October.—(Lord Brett.)
	On Question, Motions agreed to.

Wool Textile Industry (Export Promotion Levy) (Revocation) Order 2008

Baroness Royall of Blaisdon: My Lords, I beg to move the Motion standing on the Order Paper in the name of my noble friend Lady Vadera.

Moved, That the draft order laid before the House on 6 October be approved. 27th report from the Joint Committee on Statutory Instruments.Considered in Grand Committee on 29 October.—(Baroness Royall of Blaisdon.)
	On Question, Motion agreed to.

Rail Vehicle Accessibility Exemption Orders (Parliamentary Procedures) Regulations 2008

Rail Vehicle Accessibility (London Underground Victoria Line 09TS Vehicles) Exemption Order 2008

Air Navigation (Environmental Standards for Non-EASA Aircraft) Order 2008

Lord Davies of Oldham: My Lords, on behalf of my noble friend Lord Adonis, I beg to move the three Motions standing on the Order Paper.

Moved, That the draft regulations and orders laid before the House on 6 and 9 October be approved. 27th and 28th reports from the Joint Committee on Statutory Instruments, 31st report from the Merits Committee.Considered in Grand Committee on 29 October.—(Lord Davies of Oldham.)
	On Question, Motions agreed to.

Planning Bill

Baroness Andrews: My Lords, I beg to move the Motion standing in my name on the Order Paper.
	Moved, That the amendments for the Report stage be marshalled and considered in the following order:
	Clause 1
	Schedule 1Clauses 2 to 36Schedule 2Clauses 37 to 111Schedule 3Clauses 112 to 117Schedule 4Clause 118 Schedule 5Clauses 119 to 150Schedule 6Clauses 151 to 182Schedule 7Clauses 183 to 187Schedule 8Clauses 188 and 189Schedule 9Clauses 190 and 191Schedule 10Clause 192Schedule 11Clauses 193 to 228Schedule 12Clauses 229 and 230Schedule 13Clauses 231 to 234.—(Baroness Andrews.)

On Question, Motion agreed to.

Business

Lord Bassam of Brighton: My Lords, there are 47 Members on the list of speakers for this important debate. If Back-Bench contributions are kept to seven minutes, we should be able to rise at around the target time of 10 pm.

Economy

Lord Myners: rose to move, That this House takes note of the current economic situation.

Lord Myners: My Lords, we are living in extremely challenging times for the global economy and financial architecture. I welcome this debate as an opportunity for this House to have an open, constructive discussion on the issues that face us. The twin global shocks of the credit crunch and the surge in energy and food prices have hit every country in the world, including here in the UK. As we are all aware, families have been hit by a big hike in world oil and food prices, while companies have seen associated rises in their costs. At the same time, as we have seen so vividly, the global credit crunch, which affected America, has now spread across the world affecting businesses and households, especially home owners. Many of the recent events in the banking system were unimaginable less than a year ago. Few predicted that by now the five largest Wall Street investment banks would have merged, sought government help or collapsed.
	Before considering the effects of the developments we have seen unfold over the recent past and what the Government are doing in response, it is useful to clarify the many forces that came together over the past 15 years to set the stage for these unprecedented events. First, we saw increasingly integrated global financial markets, with enormous amounts of capital flowing across borders every day. Secondly, improved policy frameworks played a major role in delivering low inflation and low interest rates across the developed world. Thirdly, the massive build-up of emerging markets' foreign exchange reserves, invested mainly in US assets, pulled long-term interest rates down to historic lows.
	As returns on conventional investments were low and borrowing was cheap, financial institutions searched for higher yields. Complex products were devised to repackage securities into new investment opportunities. Advances in technology and processes made possible the repackaging and global distribution of these securities, and banks borrowed heavily from global capital markets to fund their investments and leverage up returns.
	Investors were overpaying for risky assets, obtaining inadequate returns for the risks involved. In other words, a global credit bubble had formed with a belief that repackaged assets could be worth more than the sum of their parts. As American sub-prime mortgages defaulted—around one in five is currently behind on its payments—that belief was shown to be false. In a highly leveraged, interconnected and complex financial system, shocks like these are profoundly felt and quickly transmitted across countries. That is how, last summer, we had a catalyst: the trouble in the American sub-prime mortgage market. Last week, the Bank of England's Financial Stability Report estimated sub-prime and related losses at almost $3 trillion. Since the global financial system was so highly leveraged, this shock is having a profound effect. Having paid too much for the assets, financial institutions are now having to revalue them, booking losses in the process, with consequent damage to their capital and, importantly, to confidence in and among banks.
	The Government are taking decisive action to deal with these challenges and have repeatedly made clear that they will do whatever is necessary to maintain financial stability.
	Later this month, world leaders and Finance Ministers will meet in Washington to discuss these global economic problems. These global shocks are unprecedented in their scope, scale and confluence, and we fully recognise that they are affecting the daily lives of families and businesses. As the IMF stated last month:
	"The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s".
	It also noted:
	"The major advanced economies are already in or close to recession".
	Why does the global environment have such an important influence on Britain? Britain is a trading nation. Openness is one of our great strengths, providing new opportunities for growth and jobs, so shocks in global markets affect us all at home. We trade around a third of our output as exports and imports with the rest of the world, receive over £100 billion of inward investment a year and over £200 billion of investment in bonds, stocks and shares from abroad.
	Millions of people and millions of jobs are influenced by our overseas links, and the UK is home to a significant number of the world's best companies. Our financial services industry—the industry at the centre of the turmoil we have witnessed—is of course a world leader, and very important to our economy.
	Although the world economy is clearly experiencing huge challenges at present, we should not lose sight of the fact that openness and globalisation, and being a key part of the global economy, has increased our national prosperity significantly. Openness will remain the approach of the Government, making the most of the opportunities available to the UK in the global economy. Indeed, it is imperative that the global problems we face are addressed by comprehensive global solutions.
	Let me say a few words regarding the present economic environment, which noble Lords know is very difficult. No Government can prevent a downturn in the face of the unprecedented shocks we and others are facing. It is going to be challenging. We have already seen output decline by 0.5 per cent in the third quarter of 2008. As my right honourable friends the Prime Minister and the Chancellor have made clear, it looks as though our economy—like all other major economies around the world—is moving into recession.
	The latest economic data show very clearly the task we are facing. The preliminary estimate of GDP growth recorded the first quarter of negative GDP growth for the third quarter of this year since the second quarter of 1992 and the weakest since the final quarter of 1990. Data suggest that individuals are reigning in spending on discretionary and big-ticket items as disposable incomes have been squeezed by high energy prices, alongside growing uncertainties arising from the global financial situation. Consistent with consumers acting more cautiously in this challenging environment, retail sales fell in September.
	Forecasters have continued to revise down their projections. Last week, the esteemed National Institute of Economic and Social Research predicted that UK growth next year will be minus 0.9 per cent, compared with its forecast only this summer of plus 1.4 per cent—a true indication of the shock of global developments on the UK economy. The Treasury will update its own forecasts in the Pre-Budget Report as usual.
	Underlining the global nature of these problems, we have seen a similar pattern in other G7 economies. GDP in the euro area fell in the second quarter by 0.2 per cent—falling a quarter earlier than in the UK. Confidence in the euro area fell back sharply in data reported last week to its lowest for over a decade. In the US, unemployment has risen significantly and just last week we saw it reported that GDP growth declined in the third quarter. Indeed, over the recent past, GDP has declined in Germany, France, the US, Italy, Canada, Japan and now the UK, so the whole G7 has seen declining output. But we should also recognise that the nature of this downturn is fundamentally different from the past. In the late 1980s, UK GDP growth was allowed to rise to more than 6 per cent, which was well above the economy's growth potential.
	As a result, inflation rose into double digits and interest rates, in an effort to control rampant domestic inflation, followed suit. As a result of these domestic policy mistakes, the economy entered recession in 1990 and unemployment rose to more than 3 million for the second time in only 10 years. Today, things are very different, so the policy conclusions we draw from these experiences are likely to be different too.
	We should make no mistake: this Government are fully aware of the difficulties and problems faced by the most vulnerable. That is why we have taken decisive action to help the economy as a whole and those most vulnerable to the effects of this global slowdown. The Government are determined to help families and businesses affected by the global economic difficulties. We will do whatever we can to support those who need it most.
	Let me outline the action which the Government have taken. Their priority is financial stability and this focus on financial stability has been critical for small businesses and families. Financial stability means small businesses having access to credit and home owners having access to mortgages. Supporting the banking system in this way is essential, not only for financial institutions, but also for the businesses and individuals who rely on them.
	Our action to stabilise the banking system is also vital for hard-working families. A sound banking system is an essential part of the everyday lives of every family in the country and an essential precondition for the long-term health of the economy. Because today's problems are global, the solutions will also be global and will require global co-operation.
	Today, Governments all over the world are using approaches that until recently could not have been considered. It is right that the conduct of policy should evolve. Just as markets change, so should policy. On 8 October, after consultation with the Bank of England and the Financial Services Authority, the Government announced specific and comprehensive measures to ensure stability in the financial system, and to protect the depositors and businesses which rely on the system.
	This comprehensive programme addresses three vital issues. First, it addresses the provision of sufficient short-term liquidity by increasing the amounts available to the Bank of England to lend through the special liquidity scheme. Secondly, new capital will be made available for UK banks and building societies so that they can deal with the current events in global financial markets while continuing their role of lending to individuals and businesses, thus supporting the economy. Thirdly, it will ensure that banks are willing to lend to each other with confidence—which will free up inter-bank lending—by offering an innovative, temporary government guarantee for eligible new debt issued by banks.
	We are also working to tackle the causes of the problems in the banking system and in global financial markets.

Lord Forsyth of Drumlean: My Lords, on the specific package that the Minister mentioned—the so-called bail-out package for banks—how did the information on those discussions come into the public domain before it was announced, which saw a fall in, for example, the royal bank's share price by almost two-thirds and did great damage to the financial system? Why have the Government not got an inquiry into how that information was leaked, along with several other instances where market-sensitive information has come out of his department?

Lord Myners: My Lords, that is not an issue on which I can comment. It is a matter for the Financial Services Authority.

Lord Higgins: My Lords, why not?

Lord Myners: My Lords, the correct agency to investigate any suggestion that there was impropriety in markets is the Financial Services Authority. The FSA is engaged in that matter.

Lord Trimble: My Lords, would it not be appropriate for the Government to consider whether their own officials have behaved properly in this matter? Hiding behind the Financial Services Agency gives the distinct impression of a guilty conscience.

Lord Myners: My Lords, nothing could be further from the truth. The Financial Services Authority is the appropriate body in this regard. It has the resources and is carrying out an appropriate investigation which will be full and comprehensive. It will allow the authority to ask questions of whoever it wishes. Perhaps I may continue.

Lord Lea of Crondall: My Lords, if the Opposition are so keen on inquiries, it would be sensible if they recognised that a few apologies are needed from the people in the banks who increased leverage by two or three times in the past three years. If we are going to hold inquiries, do we not need a wider public inquiry? Why are the Opposition not looking at the banks?

Lord Myners: My Lords, I agree with my noble friend.
	As recent events have shown, we need more effective global regulatory co-operation. The UK was among the first to call for increased transparency of financial institutions' exposures, for improvements in the effectiveness of credit rating agencies, and for agreements for enhanced capital adequacy requirements. There have been improvements in risk disclosures by banks and the steps being taken to establish the college of 30 cross-border supervisors by the end of this year will be a material step forward in that respect.
	In this new age of global markets we also need more effective global institutions. The challenges we face are significant, and it is right that we give attention to strengthening global institutions to ensure that they are well placed to meet those challenges. The Prime Minister has been at the forefront of calls to create a new framework for global financial stability. These led, under the UK's G7 presidency in 1998, to the creation of the Financial Stability Forum. The problem with the Financial Stability Forum today is that it has knowledge but no power and, while the IMF has power, it has less knowledge. This is why we need the two of them to work better together, and with national regulators, towards a system that gives early warning of incoming global economic and financial shocks.
	Financial stability and strong banks are an essential precondition to restimulating lending and an eventual recovery in the wider economy. Just as we led the way on the global recapitalisation of banks, we will lead the way when it comes to the wider global economy. At home, the Government are now implementing a comprehensive set of measures, reaching commercial agreements with UK banks and building societies to stabilise their capital position and ensure that they are able to perform well for the economy in the future. The Chancellor is providing an update on how the Government's investments in these banks will be managed to the Treasury Select Committee this afternoon. The comprehensive programme we have introduced includes taking Northern Rock and part of Bradford & Bingley into public ownership, protecting depositors and making sure their problems could not spread. On FSA and Bank advice on financial stability grounds, we introduced extraordinary measures to amend the competition regime so that the merger of Lloyds TSB and HBOS could proceed swiftly. The problems of liquidity in the banking system are being tackled directly through the Bank of England's Special Liquidity Scheme.
	Alongside our action to promote financial stability, the Government are determined to help families and businesses with targeted support for those who need it most. That is why we are supporting families facing higher food and fuel bills through raising the income tax personal allowance by £600 for 2008-09, worth £120 for every basic-rate taxpayer. Moreover, making this announcement ahead of the PBR means that most basic-rate taxpayers will have seen this in their take-home pay from September. We have postponed the fuel duty increase for all of 2008, saving businesses and families nearly £100 million a month. We are making additional payments to households containing over-60s and over-80s, of £50 and £100 respectively, alongside the winter fuel payment, to the benefit of around 9 million households. We have also announced a £1 billion package of energy efficiency measures, including at least 50 per cent off a range of practical energy-saving devices for all households, with 11 million of the most vulnerable households qualifying for these free of charge.
	The Government cannot and should not try to prop up house prices, but we are supporting the home owners of today and of the future by removing stamp duty from all house purchases under £175,000 for the next year. In addition, we have provided first-time buyers with access to expanded home-buy direct shared-equity programmes, alongside earlier support for mortgage interest to home owners in difficulty and reducing the number of repossessions through new mortgage rescue schemes. We are also working to improve the mortgage markets, taking advice from Sir James Crosby, who will report to the Chancellor later this autumn ahead of the Pre-Budget Report.
	We are supporting businesses. An announcement last week from the Chancellor means that Britain's small and medium-size businesses stand to benefit by up to £4 billion from the EIB. As the Chancellor said, small firms are vital to the strengths of our economy. We need to make sure that, despite the global credit crunch, they have access to the loans and capital they need to help their business grow and develop. Together with a range of other measures being taken by the Government, these commitments will contribute to ensuring that strong small businesses in the UK have continuing access to the best support available.
	We are confident that our economy will get through the difficult period. We are better placed to weather this global economic storm than we were in the 1970s, 1980s or early 1990s because of the decisions we have taken over the past 10 years.

Lord Lang of Monkton: My Lords, the noble Lord has just repeated what the Prime Minister and the Chancellor have repeatedly said about how remarkably well placed the United Kingdom's economy is to withstand the current problems. If that is so, how does he account for the plunge of the pound against both the dollar and the euro?

Lord Myners: My Lords, the currency markets are febrile and volatile and we have seen the phenomenal strength of the yen and the US dollar. Sterling has been a weaker currency, alongside several other currencies, but that is as much a feature of the strength of the dollar and the yen as the weakness of sterling. Indeed, as the IMF said recently when referring to the UK:
	"For over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement ... the fruit of strong policies and policy frameworks, which provide a strong foundation to weather global shocks".
	There are a number of reasons why we are better placed than in previous downturns. First, the Bank of England's independence has continued to give us low interest rates and inflation well below the double-digit levels we saw in earlier decades. On 8 October the Bank, along with major central banks around the world, decided to cut interest rates by 0.5 per cent to 4.5 per cent. It made clear that while inflation had risen because of food and energy prices it is now set to fall back, and could fall back very significantly. Secondly, our labour market is the most flexible in Europe. Employment remains close to record highs; there are more than half a million vacancies in the economy; and wage pressures are subdued, led by our own responsible decisions on public sector pay. Thirdly, Britain remains one of the best places in the world to do business, a magnet for overseas investment. Fourthly, thanks to the decisions we have taken since 1997, public debt remains low. This means we can provide targeted support for those who need it most in these difficult times and protect vital investment in our infrastructure—investment that was sacrificed in previous downturns; investment that will underpin our future growth.
	One point of encouragement in recent weeks amidst extremely challenging developments has been the fallback in the price of oil from summer's recent high. Oil prices are presently around $60 a barrel compared with $150 a barrel during the summer of this year.

Baroness Oppenheim-Barnes: My Lords, while the Minister is boasting about the fall in oil prices, will he also acknowledge that because we have to pay for oil with petrodollars, and because the pound is so weak against the dollar, we will lose most of that benefit?

Lord Myners: My Lords, I was not boasting; I was sharing the facts with the House. The price of oil has fallen substantially in terms of any currency, including sterling.
	It is important to consider also the role of fiscal policy. Rules provide discipline for the Government; they are the means to an end. Our core objective right now is to get the economy through these difficult times. As the Chancellor set out in his Mais lecture last week, the average current budget between 1997 and 2006 was in balance—the only time that has been achieved over a cycle since the early 1970s. As the Chancellor has also made clear, that is how the Government managed something that many thought would be impossible: to triple public investment while cutting government debt. In other words, we fixed the many roofs that needed fixing—the roofs of schools, hospitals and homes throughout the country. No one at that time was arguing for less spending on education, health or transport.
	We also had enough flexibility to accommodate negative shocks, such as the bursting of the technology bubble in 2000, as well as positive shocks, such as the receipts from the spectrum auctions, which were used in full to repay debt. What matters is that the public finances start from a position of strength, with public debt low as a share of national income and low compared to other countries. People should be in no doubt that the Government will take the decisions necessary to ensure sustainability of the management of public finances in the future.
	Our fiscal framework leaves room for the rules to adapt to today's global challenges by providing support for the economy, maintaining investment now and reducing borrowing and debt later. In the short term the twin shocks have meant, among other things, lower than expected growth, higher than expected inflation, falling house and equity prices and fewer jobs and reduced earnings growth in the financial sector. It is clear that those economic disappointments will impact negatively on the public finances.
	Discipline imposed on public finances through the fiscal framework has meant that net debt is now low by both international and historical standards. We are in a good position to manage this downturn.

Lord Ryder of Wensum: My Lords, does the Minister agree with his noble friend Lord Desai, who wrote in the Evening Standard in September, before the collapse of the market, that Mr Darling "inherited an empty kitty" from the Prime Minister when he took over as Chancellor? Who is right, the noble Lord or the Minister?

Lord Davies of Oldham: My Lords, before my noble friend replies, and I am sure he will, it will have been noticed by the House that all six interjections have been made by former Members of the other place. If we want to translate the procedures of this place into exactly the same as at the other end, we can carry on as we are going. I merely draw to the attention of the House that on the Wales Bill last year, in this House the opening speech took 25 minutes while in the other place it took two hours and 10 minutes. This House is self-regulating; I hope some Members will practise some self-regulation.

Lord Strathclyde: My Lords, that is a good attempt by the noble Lord to protect the Minister, but I thought the Minister was perfectly able to defend himself. During this debate there have actually been very few interruptions, and the fact that those intervening have all been former Members of another place proves nothing. I, for one, am not.

Lord Shutt of Greetland: My Lords, I am here to respond to this debate in due course, but I have to say that I am at one with what has been said; these interruptions are not a good thing. The Members on these Benches have two and a half hours to make their contributions, and I hope that they will be listened to when their turn comes.

Lord Myners: My Lords, I am grateful to the noble Lord, Lord Shutt, for his comments. My noble friend Lord Desai is an economist of great repute, but on this occasion I believe his judgment was wrong.
	We will not run risks with public finances. The Pre-Budget Report will set out how we are supporting the economy in the short term, while taking the necessary actions and decisions to ensure that public finances remain on a sustainable path in the medium term.
	In conclusion, this is the first great financial crisis of the global age. Its effects are being felt throughout the world. Loans are harder to find and the cost of credit is higher, but we have taken actions to address these and other pressure points. There will be some lasting effects: rest assured, banking will be different in the future. The roles of government and regulators are being redefined, but new opportunities will emerge from this crisis, opportunities we should be confident the UK will seize and exploit with great success. I beg to move.
	Moved, That this House takes note of the current economic situation.—(Lord Myners.)

Baroness Noakes: My Lords, I thank the Minister for introducing this important debate, for which we have been pressing since the House came back last month. I welcome the Minister's agreement with the noble Lord, Lord Lea, about having a public inquiry into the issues surrounding the banks. I hope that it will cover the way in which Ministers have behaved throughout. We look forward to hearing further details.
	It sometimes seems as though the Government are occupying a parallel universe, in which they have exercised outstanding stewardship of our economy and have made no mistakes. They lay all the blame for today's problems on others, including irresponsible US lenders, greedy bankers, commodity traders and inadequate international financial architecture. And, as they told us last week, the economy will be all right because the Government will tear up the rule book—their own fiscal rule book—and spend and borrow without limit.
	We have lost count of the number of times that the Prime Minister, when he was Chancellor, claimed to have abolished boom and bust. He presided over an economy built on debt, both government and private. He believed in stories of economic miracles spun by Alan Greenspan, and even made him an adviser to the Government. He created an economy which is not well balanced and not well prepared for the downturn—a possibility which he denied. To quote the Institute for Fiscal Studies:
	"We are entering the current recession with one of the largest structural budget deficits in the industrial world and a debt level ... which is larger than that of most industrial countries. We have done less to reduce our structural budget deficit and less to reduce our debt than most other industrial countries since Labour came to office".

Lord Soley: My Lords, the noble Baroness's party has indicated that it wants to take interventions, and I am grateful to her for giving way. If our debt level really is greater than that of other countries, how does the noble Baroness explain our position in the G7 as having one of the lowest?

Baroness Noakes: My Lords, we may have low debt but we do not have relatively low debt compared with other industrial countries. That is why we are less well prepared, which is what I said, compared with other countries.

Lord Eatwell: My Lords, I am afraid that the noble Baroness is misinformed. The debt to GDP ratio of the UK is the lowest in the G7 except for Canada, a raw material-producing country.

Baroness Noakes: My Lords, I quoted the Institute for Fiscal Studies, a well known institute which has excellent material. I quoted it word for word. I can only suggest that the noble Lord, Lord Eatwell, takes that up with the IFS after this debate.
	The foreign exchange markets have passed their own verdict on the Government's handling of the economy. The value of sterling has fallen nearly 25 per cent in the past year. This has outdone even the fall under Harold Wilson of 20 per cent in 1976, which forced us into the hands of the IMF. It is certainly higher than the 18 per cent fall after Black Wednesday, so I hope that the Government will now desist from making comparisons with that period in our economic history; they have now outdone that, too.
	I remind the House about the economy that the Government inherited in 1997. There had been strong economic growth since 1992, unemployment was falling rapidly and RPI inflation was 2.6 per cent. What do we have now? Inflation is more than 5 per cent, growth ground to a halt in the middle of this year, and the consensus is that we are now in recession. The Government have refused to give updated forecasts on growth. The Minister referred to the Pre-Budget Report, but that has gone AWOL. I hope he will say when winding up when we can expect the moment of truth when the Government give their own forecast for the future.
	The Government have boasted about creating new jobs and raising employment levels, but more than 80 per cent of the new jobs were taken by migrant workers. On a claimant-count basis, unemployment has hardly moved since 1997, economic inactivity has remained at more than 20 per cent and youth unemployment has actually risen. As this characterised Labour's boom, we were not surprised to see in the latest statistics that the bust is feeding directly into a jump in unemployment and jobseeker's allowance applications, coupled with a fall in employment.
	The Prime Minister, when he was Chancellor, used to boast of his prudent approach to public finances. He invented two fiscal rules to shore up his image as a man to be trusted with the economy. This must count as one of the greatest con tricks in political history. The golden rule—borrowing only to invest over the whole cycle—has been so manipulated and distorted since it was invented that no serious commentator pays it any heed. The second rule—keeping public borrowing within 40 per cent of GDP—has long been something of a joke because of the dodgy accounting, such as keeping PFI debt and Network Rail off the books, and it has become risible since the Government nationalised Northern Rock. Public borrowing is in truth well over 40 per cent and rising rapidly.
	Last week, the Prime Minister and the Chancellor abandoned the rules and have been spinning that they have discovered a truly wonderful Keynesian idea of combating recession by letting borrowing rise to unspecified levels, but it is unclear whether the Government are talking simply about the automatic stabilisers—the natural effect of rising benefit payments in a downturn coupled with falling tax receipts, which pushes up borrowing—or whether they are planning to go further and embark on a real spending spree in the hope that public expenditure can buy the economy out of recession. I hope that the Minister can clear that up today because the ambiguity is damaging our country's credibility, as we have seen in the foreign exchange markets.
	Let me make our position clear: we think that a spending spree would be very dangerous. Our economy is weak precisely because the Government have overspent and over-borrowed in the good times. We should certainly support small businesses and hard-pressed families, but that must not be an excuse for taking the brakes off public expenditure. We hope that the Bank of England, whose independence we strongly support, will be able to reduce interest rates and provide some much-needed relief for businesses and individuals, but it will rightly be cautious if the Government embark on an inflationary course of unrestrained spending and borrowing.
	We believe that the duty of a Government is to nurture the economy in the good times, so that it is well prepared and resilient for the bad times. It is downright dangerous to pretend, as the Government have done, that the cycle has been abolished and that there will be no more bad times. Labour's era of high spending and high borrowing has left our economy unnecessarily weak in the face of the problems that we now face. We are paying for that weakness through lost growth opportunities and through inflationary pressures from a weak pound. We are also likely to have to pay for it through higher taxes to reduce the extra debt that will now pile up. That is the trajectory that this Government have set for our economy.
	In 1989, the Prime Minister wrote:
	"Our balance of payments matters. No Chancellor who claims to have a medium-term strategy for long-term prosperity should treat a balance of payments deficit with cavalier disregard".
	The truth is that our balance of payments record during the past 10 years is one of large and increasing deficits. If that is not cavalier disregard, what is?
	The Government have presided over an extraordinary expansion of personal debt. Individuals followed the Government's lead and spent on the back of debt. The Government were only too happy to have the apparent miracle of continuous growth buoyed by consumer spending. They showed a complete lack of interest in the evident housing bubble, saying complacently that debt-to-income ratios were healthy. Personal debt now totals nearly £1.5 trillion, which is roughly the same size as our GDP.
	In 2004, my noble friend Lord Northesk, on the eve of personal debt breaking through the £1 trillion mark, secured a debate on debt in your Lordships' House. The savings ratio had then fallen from around 9 per cent to around 6 per cent. The noble Lord, Lord Davies of Oldham, who I am pleased to see is in his place, in a display of complacency said:
	"The fact that the people today are prepared to reduce their savings ratios is a reflection of the fact that they have faith in the Government's handling of the economy".—[Official Report, 9/6/04; col. 339.]
	Since then, the savings ratio has slumped to virtually zero and, if pension contributions are eliminated, it is now negative. Do the Government still think that this is a statement of confidence in their handling of the economy or will they admit to a tiny bit of concern? Increased saving is a rational response by individuals to tough economic times. What does the Minister think will happen to GDP growth when the savings ratio rises again?
	It has been well documented that private sector pension schemes have been irreparably damaged by this Government, starting with the abolition of ACT. The TaxPayers' Alliance has today costed this as £225 billion taken from pension scheme values. At the same time, the Government have done virtually nothing to deal with the burden on taxpayers of unfunded public sector pensions, with cost of that, overhanging the economy, estimated at more than £1 trillion. No Government could be proud of such a legacy.
	I am sorry that the noble Lord, Lord Myners, will not wind up the debate this evening. I had hoped that he would bring the refreshing honesty that he showed when speaking to "Sky News" on 23 October about the financial crisis. He said:
	"Nobody should say: 'Don't blame me guv, it's not my fault!' Everybody should say: 'Looking back on it there are things we would not do again in future'."
	Perhaps the noble Baroness, Lady Vadera, will be able to tell the House this evening what the Government will not do again in future.
	I am delighted that so many of my noble friends have chosen to speak today, and I am sure that they will add to the items on my charge sheet. The Government have not only failed to fix the roof while the sun was shining but undermined the very foundations as well.
	We do not relish the prospect of a weak UK economy and so will support the Government in any reasonable policies to restore it, just as we have pledged to do in respect of the Banking Bill. However, we stand ready with a plan based on fiscal and financial responsibility to bring much needed economic change in future. We have had to pick up the pieces after Labour Governments before and, for the sake of our country, we are prepared to do it again.

Lord Newby: My Lords, no doubt like many other noble Lords, I accumulated in the run-up to the Summer Recess a great pile of unread submissions, reports and analyses on the economic situation, which stood as an accusatory heap at the side of my desk. I put off reading them as long as I could, because most of them were worthy but extremely dull. Economic events, however, during September and early October rendered virtually all these tomes redundant. The economic map had irrevocably changed and I could safely ignore my pile; it belonged to history.
	Economic events over the past two months have been the most dramatic and alarming of our lifetimes. The global banking system came within days, if not hours, of total collapse. Whole sectors of the economy, led by but not limited to construction, have collapsed. There is consensus that, if we are really lucky in the UK, unemployment will rise by only 1 million over the next 12 to 18 months. In these circumstances, we must ask not only why our much vaunted system of Anglo-Saxon capitalism has been found wanting, but what action is now required to minimise the costs of the recession and build a more robust system for the future.
	As to why all this has happened, there is, of course, no shortage of villains. Depending on where you stand, they include venal bankers, dodgy credit-rating agencies, supine regulators and hubristic Governments. Between them, they encouraged an almighty bubble of debt that would inevitably burst and which, indeed, now has burst, with devastating consequences.
	How did this happen? Why did so many sophisticated economic actors so dramatically fluff their lines? As in so many cases, the newly rediscovered guru of such things, John Maynard Keynes, got it right in a phrase. He described as "animal spirits" the phenomenon in which a herd mentality develops, which assumes that current trends will continue indefinitely and which sneers at any questioning voice.
	Such irrational bursts of exuberance and subsequent collapse are of course not new. Some world-weary cynics argue that this is just the way of the world, that booms and busts come and go and that the upward graph of human progress quickly resumes. There is obviously something in this argument, but it would surely be irresponsible to simply shrug our shoulders and treat this as a blip. Apart from anything else, the human misery that a recession, let alone a depression, brings compels us to act wherever we can.
	Unlike the noble Baroness, I do not intend to dwell too long on the contribution of the Government to the current crisis, but I want to mention three points. The first point is hubris. The Prime Minister boasted of the end to boom and bust. He has also repeatedly said that we were better placed than other countries to withstand a downturn. Although he has acted decisively in recent weeks, this arrogant cast of mind has found Britain particularly ill prepared in many respects to deal with the current situation.
	The Government's second mistake was to persist with a large budget deficit during the boom, so that now the cupboard is relatively bare when government expenditure is bound to rise and tax incomes to fall even without a further fiscal boost.
	The third shortcoming was dilatoriness in dealing with the unfolding crisis. The first manifestation of this was the six months that it took to deal with Northern Rock—ironically, in the light of later events—largely because the Prime Minister was afraid to be seen to be nationalising a bank. During the first half of the year, we saw a series of half-hearted, or worse, attempts to deal with the growing problems. For example, attempts to revive the construction sector have been pathetic. The Government equally did nothing to rein in the ever more irresponsible levels of lending and borrowing. For example, it is now clear that, despite knowing that the Icelandic banking system was on the verge of collapse for months before it happened, the Government said and did nothing—and this was when many local authorities thought that they were being encouraged by the Treasury to put money in Iceland.
	That is, however, all in the past and our focus must now be on the future. If we are to make sound judgments in economic policy making going forward, we need to accept a number of fundamental realities. The first is that, on a global level, the balance of economic power has irrevocably shifted. As we see Barclays being rescued by funding from the Gulf or the Prime Minister begging the Chinese and the oil-rich Arab nations to support a new global financial bail-out fund, it is clear that something has fundamentally changed. The world's financial institutions need to reflect this change.
	As we discussed in your Lordships' House last week, it is no longer possible to deny China, India and the other resource-rich nations a full role in the world's financial institutions, or, for that matter, at the UN. It is not clear to me that the Prime Minister, President Sarkozy or the US fully realises that it will be impossible to get these countries to make the contribution that we are now asking of them without giving up the dominance of our power in the Bretton Woods and UN bodies that the West has enjoyed since their inceptions. However, we will have to do so.
	Secondly, banking is not like any other sector of the economy. With such a small number of banks in the UK, it is abundantly clear that the Government cannot allow any of them to fail. This has major implications for bank regulation. It argues strongly for treating banks as utilities and regulating them in a way that makes it impossible for them to act in the reckless manner of recent years. One way of doing so would be to segregate retail banking and any day-to-day business banking from investment banking and the more esoteric financial products that have caused so much recent grief. I realise that there is nothing new in this; the Glass-Steagall Act in the US sought to do roughly the same in response to the Wall Street crash. I am not necessarily arguing for something identical to Glass-Steagall, but there is now an extremely strong prima facie case for ring-fencing those aspects of banking that constitute the utility and isolating them from more risky banking activities.
	My reasons for thinking that we need a fundamental look at banking regulation are reinforced by the response of the upper echelons of the banking sector to recent events. I have no doubt that the vast majority of those involved in providing banking services are perfectly honourable and responsible citizens doing a good job. However, this attitude does not extend to the highest echelons of the profession. The top bankers still seem to think that they can carry on as they were, despite the fact that without the government action—let us remind ourselves that it amounts to support of various kinds totalling half a trillion pounds—they would in many cases be bust.
	The attitudes of the banks to the statement of the Government a couple of weeks ago that those getting a capital injection would not pay bonuses and would continue lending to small business at previous rates seem to be verging on contempt. Bonuses are still being paid and small businesses are still going to the wall because the banks are withdrawing support. At the same time, Barclays is prepared to pay almost anything to avoid having any controls on the way in which top management behaves. Northern Rock, wholly nationalised, is the most aggressive of all banks in repossessing from people whom only months ago it encouraged to take out 125 per cent mortgages. I ask the Minister why, when the Prime Minister said that he expected banks to pass on the recent half per cent interest rate cut, Northern Rock failed to do so.
	The Government are now negotiating a revised banking code. Can the Government give us any assurance that it will go beyond platitudes and include firm, specific provisions? How do the Government plan to police such a voluntary agreement, given the previous track history of the banking sector?
	One consequence of the banking crisis is that there will be fewer independent high street banks and competition will be reduced. We need to look, in the light of this, at how we can help to diversify the sector, particularly for people at low income levels who will always be relatively unattractive customers for the big banks. We need an urgent look at how we can strengthen the credit union movement and the possibility of developing a new tier of community banks.
	It is clear that the banking crisis is but the precursor to a crisis in the real economy, which is now starting to unfold. The collapse of the housing market and the construction sector is becoming more widespread as the contagion spreads to other sectors, such as retail and vehicle manufacturing.
	What measures are now needed to mitigate these effects? The first must be a rapid reduction in interest rates. There seems every prospect that the MPC will indeed reduce rates again this week but, with rapidly falling inflation and rapidly rising unemployment, there seems little reason why it cannot do so dramatically, arguably even within the remit of the existing legal framework. There is a strong argument at this point for a change, if it is necessary, in the terms of reference of the MPC under the Bank of England Act. I shall be interested to hear the Minister's response to the proposal of the noble Lord, Lord Saatchi, in that regard.
	Secondly, we need to cut taxes for those on low and middle incomes. We can do this without increasing government borrowing by ending upper rate relief on pensions, clamping down on avoidance, harmonising income and capital gains tax rates, increasing green taxation and trimming overall government spending. These measures would help those who are struggling the most to pay for essentials and to keep spending money in the high street.
	We must ensure that mortgage repossessions are a last resort. The Government have made some positive steps on this front, but we do not think that they have done enough. For a start, they could stop Northern Rock behaving in such a belligerent manner. There are already nearly 2 million families on housing waiting lists. We can help them by allowing councils and housing associations to buy unsold properties and land from construction companies. That would replenish the social housing stock, stimulate the housebuilding industry and provide homes for people who desperately need them.
	On the Government's general fiscal stance, they may be able to bring forward somewhat some building projects in the public sector. If possible, they should do so. However, turning the tap on quickly is in reality impossible and should not be attempted unless the quality is maintained and cost levels kept in check.
	One of the constraints on the Government's bringing forward capital projects is a shortage in some sectors of adequate engineers and other skilled staff. More generally, it is clear that, if we are to compete more successfully in the new economic circumstances, we need many more skilled maths, science and engineering graduates. If necessary, financial incentives should be given to those wishing to study these subjects.
	Of course, one area of economic activity offers the prospect of many new jobs and investment—namely, reducing our carbon emissions by the 80 per cent to which the Government are now committed. This should start with an expanded programme of home insulation, with a view to bringing all homes up to high standards within the next decade. This can be funded through arrangements with the energy companies, which received a £9 billion windfall from the European Emissions Trading Scheme and could employ many of the property surveyors and construction workers currently on the labour market. There is also a great opportunity for employment in the construction of wind turbines. That offers particularly valuable prospects for dock communities such as Hull and Newcastle.
	Finally, we need a fundamental reappraisal of how we ensure the future prosperity of our economy. I am not at all gloomy about our potential as a country to thrive in a global marketplace. We have many strengths derived from a combination of reputation, creativity, innovation and the English language, and I am sure that the City will play a big part in this future success. However, we need a more balanced approach, in which we are no longer in thrall to the world of finance but give equal priority to those other services and high-tech manufacturing sectors in which Britain has been, and can remain, a successful global player.

Lord Bilimoria: My Lords, last week during a debate I tabled on reforming global financial institutions, it was made clear that the situation is so critical, and the threat to our economy so severe, that we have no time to go on apportioning blame. I believe that all our focus and all our energy must be piled into finding the solutions that will free us from the grip of this financial crisis.
	I want to start with the fundamentals and examine the Government's attitude towards business. We welcomed the noble Lord, Lord Mandelson, to this Chamber three weeks ago. However, his appointment made him the fifth Secretary of State for business in five years. If I had changed the chief executive of my company five times in the past five years, my company would have gone bust a long time ago. Perceptions can be deceiving, but the Secretary of State's office at the Department for Business, Enterprise and Regulatory Reform has been fitted with a revolving door and we are justified in questioning the Government's commitment towards business.
	As chair of the UK India Business Council, I often attend meetings between our Secretary of State for business and his Indian counterpart, for whom I have the greatest sympathy. Having served his Government in the same post for four years, every year the Indian Minister for Commerce and Industry is having to read the biographies of the latest UK incumbent.
	This is not just about the Secretary of State for business, it is also his Ministers. After the resignation of my noble friend Lord Jones of Birmingham as Minister for trade, his replacement now holds responsibilities at the Department for Business, Enterprise and Regulatory Reform and the Department for International Development. My noble friend Lord Jones of Birmingham spent his time focused entirely on banging the drum for British business around the world, as he always said, so is this really the time to dilute our efforts in promoting trade and investment?
	I will turn my attention to SMEs and entrepreneurship, which have been overshadowed by the banks in this financial crisis but which are equally threatened by it, if not more. The Chancellor, Alistair Darling, announced last week that £4 billion would be available for small and medium-sized enterprises to support businesses through the downturn; and the Minister reaffirmed that today. My understanding is that this funding will come from the European Investment Bank via British high street banks and will amount to £1 billion of loans each year for the next four years. According to the British Bankers' Association, net lending to SMEs totalled £5.7 billion in the first six months of this year alone. We have of late become accustomed to a new financial vocabulary, where figures reaching into the many billions no longer generate the awe that they once did. But let us be in no doubt that £4 billion over four years is nowhere near enough, considering the current situation.
	I call on the Government to vastly increase the Small Firms Loan Guarantee scheme, which my business benefited from in its fledgling years. I have used before in this House the example of the United States. Last year, its Small Business Administration backed more than $12.3 billion-worth of loans to small businesses. In the same period, our Government's Small Firms Loan Guarantee scheme made available £360 million. That is £360 million versus $12.3 billion.
	The Government could also learn from a tiny country such as Israel. Its Yozma initiative was a government-backed venture capital scheme that has been a catalyst for thousands of successful high-tech and knowledge-based companies with government-backed venture capital investment. The companies have been crucial in giving Israel a cutting-edge advantage globally, in spite of all the problems that exist in that region. As a result, Israel has been attracting huge amounts of foreign direct investment. Now is the time for the Government here in Britain to create a multi-billion-pound government-backed, venture capital fund, so that we, like Israel, can punch above our weight as a country.
	There has been much talk of, and we have already heard in this debate, about trickle-down economics, with a Keynesian-inspired increase in public spending, being mooted at the highest levels of government as a solution to this crisis. Increases in public spending will, I fear, hardly help small businesses. All too often, much of it does not filter through and what does often takes too long and is too late. It would be far more effective for the Government to support SMEs directly. Entrepreneurs and SMEs are not asking for a hand-out, but a help-up, be it through loans or investing in training.
	It costs approximately £10,000 to attend the business growth and development programme at Cranfield University which, I know from first-hand experience, transformed my business and helped to secure its growth path. How many companies get a chance to attend that programme? Some 150 a year. If the Government were to support SMEs through courses such as the BGP at Cranfield, the effect would be enormous, and the biggest beneficiary would be the Treasury.
	Now is also an opportune moment for the Government to reverse those measures which over the past 18 months have served to diminish their once excellent relationship with business. I am talking about the non-dom levy; the removal of taper relief on capital gains tax; the increase of corporation tax on small businesses and the taxation of foreign companies' earnings. Thanks to those measures, the Government entered the financial crisis having already alienated the business community. Now is the Government's chance to make amends.
	Now is also the time for the Monetary Policy Committee of the Bank of England to cut interest rates. The US rates, as we all know, are down to 1 per cent, but here we are at 4.5 per cent. We are out of the euro; let us make the most of it and urgently cut our interest rates. Groucho Marx once said:
	"Politics is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies".
	Sticking to a rigid target for inflation at a time of crisis like this is an example of that saying being brought to bear.
	Parliament has been sitting for a month since the Summer Recess; yet today is the first opportunity for this House to debate the financial crisis at any length. Where are the Government's priorities? This does not look right to me, this does not feel right and this is not right. For all their good intentions, this Government have yet to grasp how much this financial crisis will hit British business, SMEs in particular and the 13 million people whom they employ—and their families.
	Through building business from scratch, I have discovered that one of the keys to that has been continually to turn threats, frustrations and obstacles into opportunities. I call on the Government to seize the opportunity offered by these unprecedented times for the Government to be bold. They have shown boldness in leading the world in the financial bail-out of British banks. Today, I ask the Government to apply the same boldness and resolve to securing our British business, especially our SMEs which are the heartbeat of our country and the engine of our economy.

Lord Lawson of Blaby: My Lords, at the heart of this debate lie two questions: how did we get into this mess and, now that we are in it, what should we do about it? I will deal briefly with both.
	Part of the answer to the first question is the inescapable working of the economic cycle, which, as Keynes pointed out in the 1930s, is in large measure a creature of the credit cycle. What has greatly magnified the credit cycle since his day is the massive growth of consumer credit of all kinds. The present Prime Minister's constant boast—even as late as his Budget Statement last year, when the extent of the housing bubble should have been evident even to him—that he had abolished the cycle and put a permanent end to boom and bust, showed not merely astonishing economic ignorance, but it made things worse; for, to the extent that people believed him, and I suspect that many did, it reinforced the unwarranted over-optimism of borrowers and lenders alike. It was an invitation to be imprudent.
	Not that that exonerates the equal folly of the bankers who, whether out of ignorance or greed, also threw prudence to the winds. Of course, the history of banking is punctuated with examples of this. Given the recurring phenomenon of banking folly and the massive growth of overall debt, the need for adequate banking supervision is greater than it has ever been, because the failure of core banks can be a threat to the entire economy. That is why there has always been a need for bank supervision, which requires at its heart that banks should possess adequate capital in relation to the risks that they take.
	We have seen worldwide a massive failure of bank supervision as banks have been permitted to boost their profitability by taking bigger risks—increasingly, risks they were unable to evaluate—while diminishing their non-earning capital. While the so-called Basel system, which was intended to prevent this, has been defective, the buck stops with national authorities, where the blame properly lies. This, above all, needs to be remedied.
	The pattern of failure has not, of course, been uniform, although it has been extensive. Among major financial centres, Spain probably comes out best and the UK almost certainly worst. The FSA has already accepted that it was asleep on the job in the case of Northern Rock. However, in fact, it was asleep on the job across the board. Indeed, at least until very recently, if you looked at the FSA website and clicked on "What we do" you would find a lot of things, but no mention at all of bank supervision. That, at least, was honest, I suppose.
	As some noble Lords will recall, when I was Chancellor I was concerned about the inadequacy of bank supervision in this country, which is why I created the Board of Banking Supervision with the Governor of the Bank of England as chairman and the best former bankers I could find as independent members. Regrettably, when he became Chancellor, Mr Brown first removed any connection between the board and the Bank, then downgraded the quality of the independent members and then abolished the board altogether, leaving the task entirely to the FSA under the profoundly mistaken belief that financial regulation and bank supervision are the same thing. They are not. Bank supervision is much more like high-level auditing than financial regulation and requires totally different skills and totally different personnel. As a result, both here and indeed virtually worldwide, there has been a complete failure of bank supervision, leading to banks being hugely undercapitalised for the risks that they were taking; hence, the severity of the present crisis.
	Now, the fire brigade has had to be activated and a massive rescue operation put in place to recapitalise the banks. I am very happy that that has happened. However, it clearly needs to be followed by the creation in all the major financial centres of an adequate system of bank supervision for the future. It is this, rather than a new Bretton Woods or a new international financial architecture, that is required. Talk of a new Bretton Woods and so on is just claptrap, and most of those who utter it have very little idea of what they mean by it.
	Two things in particular will be assisted by getting bank supervision right. The widespread banking folly that we have seen has been caused in no small measure by a form of Gresham's law of lending, which has meant that bad or imprudent lending has driven out good or prudent lending. This happens because prudent banks see their market share gradually fall as that of imprudent banks rises, so eventually they decide to protect their market share by emulating the imprudent practices that they had previously eschewed. Adequate supervision would nip that process in the bud.
	Again, at present there is understandable concern at the wide range of institutions that have had to be rescued in one way or another by the authorities here and in other countries. That became necessary because the core banking system was allowed to become so undercapitalised and thus so fragile that the collapse of non-core institutions might well have brought it down. Adequate supervisory requirements, properly enforced, would have ensured that the core banking system was strong enough to allow non-core institutions, if they made their mistakes, which they did, to go to the wall, which would have been very much better. Therefore, it is clear what needs to be done to avoid a repetition not of banking folly but of banking folly on the scale that we have seen.
	What, finally, do we need to do now over and above the rescue facilities that, happily, are already in place? There is of course no way that we can escape the recession that is already upon us. The greater the binge, the greater the hangover, and this has been the greatest consumer credit binge ever.
	It is not just banks that need to rebuild their balance sheets; consumers do, too. The fool's paradise of debt-fuelled prosperity has to end as consumer indebtedness—which, incidentally, as a proportion of disposable income is far higher in this country than even in the United States—is brought back within the limits of prudence.
	However, the recession, although inevitable, can and should be mitigated. The inflationary threat will one day re-emerge but for the time being it has gone. As other speakers have already said, the time has now come for significant further cuts in interest rates, preferably on an internationally concerted basis. Among other things, this would greatly help confidence, which is always important at a time such as this.
	I am not persuaded, however, that an attempted fiscal stimulus is desirable. Of course the budget deficit will rise as the recession erodes tax revenues and increases benefit payments, and that is no problem. But in the UK in particular, where, under this Government, the underlying fiscal position has deteriorated alarmingly, discretionary action to cause it to deteriorate still further would, in my judgment, be unwise. Public spending increases, other perhaps than accelerating sound infrastructure projects already in the pipeline, would be particularly unwise, slow to come into effect and hard to reverse, unlike interest rate cuts.
	Temporary tax cuts, although less harmful, are probably also unwise. A temporary cut in VAT, although much talked about, would be prohibited under European Union law. But even if it were not, the numbers need to be borne in mind. As my noble friend Lady Noakes has pointed out, under this Government, the savings ratio has plummeted from 10 per cent to virtually zero as a proportion of disposable income. A recovery of that ratio is both inevitable and necessary. Even if it returns only half way, to 5 per cent, that implies a reduction in annual spending of roughly £50 billion, a sum way beyond the prudent or maybe even practicable capacity to borrow, over and above what will need to be borrowed as it is.
	I believe that any plausible, discretionary fiscal loosening would, at best, be of trivial use now while adding to the problems that already lie further ahead on this front. In short, the right answer—in so far as there is one, for the worst recession since the war is now unavoidable—is sizeable interest rate cuts now and, above all, proper banking supervision to prevent a recurrence on anything like this scale in future. And, of course, there should be no more nonsense about the end of boom and bust.

The Lord Bishop of Chelmsford: My Lords, it is always difficult for us to come to terms with a fundamental truth that we are not in charge of events. Our world is so often changed and shaped by the unexpected. That shifts the political task from seeking to control events to one of responding to what is happening. We all know that a storm has hit us and our survival will depend on the quality of leadership and the depth of our shared vision and values. I share the noble Lord's concern that, in the midst of the turbulence, the last thing we need is to collapse into mutual recrimination and blame. Lessons will have to be learnt, but a coming together by us all will be required to reconstruct that which is damaged by the storm.
	As I know from my experience in Christian Aid during the tsunami, houses built on sand get washed away. Although this financial storm has not washed away the house of our economy, it has revealed cracks and faults both in our financial institutions and in our social culture. We now see a profound mismatch between personal and public morality, the behaviour of citizens and that of corporate institutions. In recent years, it has been obvious that we have been living far too dangerously. It has become okay in our country to live in debt as a short-cut to prosperity. We have sent our young people off to university and told them that it is now publicly acceptable to leave with £30,000 worth of debt. People have gone into banks and asked for mortgages of, say, £45,000 and been told, "Why don't you have three times as much?" whether they need it or can afford to pay it back. "Things can only go on getting better", people were told; "The risk is worth taking".
	I expect I am not alone in this House this afternoon in having friends who work for highly professional businesses that have been bought out, in recent years, by hedge funds—in one case I can think of, twice in five years—which do not have a clue about the professional character of the business they have taken on. The deal has been simply about profit in the short term, making money by the shortest route. That could not go on and certainly cannot go on.
	As we know, storms have no respect for the integrity of people; the destruction is indiscriminate. Suddenly someone who has sought, with wisdom and prudence, to save for their retirement faces the collapse of the value of their investments at the same time—this is the ethical mismatch—as the high financier and banker walk away from the collapse with bonuses and income intact. The moral affront of the crisis is the way it hits the weak and innocent and leaves the culprit to go free and relatively untouched.
	The moral confusion is evidenced in the reality that at the same time as we are counselling people not to take on unsustainable debt, the Treasury is proposing to let the national debt free of past restraints. It seems that there is one rule for citizens and another for public authorities. That is the moral corruption of a time such as this. We all know that things are going to get worse for ordinary people. A storm leaves wreckage everywhere. Things have not only to be cleared up, but built on a better basis. I am particularly concerned for the poorest who are at risk of loan sharks. I echo the noble Lord's question to the Minister. I thank the Government for what they have done for credit unions in recent years, but what plans do they have further to strengthen that facility across the country?
	We need to assert some basic values such as: returning to spending what we have rather than constantly borrowing against an unknown future; encouraging people to save and to trust the security of their savings; moving away from a culture of debt and returning to banks and financial agencies helping people to manage their affairs with care and foresight; the public purse setting an example of the husbanding of our common national resources; and ensuring in the midst of this hardship that we target resources to offer as much protection and help as we can to those most at risk.
	In thinking of those most at risk, will the Minister reassure us that the international aid budget and the targets that the Government have set for it are secure? This is an international crisis, and we fear its impact on the most vulnerable nations in our world, not just in the developed world. It is surely time for all of us to challenge this nightmare culture where people are encouraged to think that they can have what they want, be it the binge-drinking culture of some of our towns and cities or the binge-banking culture that has been going on on the markets. Only a sense of shared values and responsibility and a move away from this straight individualism into a community neighbourly life will enable us to live through to a better place. A time of crisis is a defining moment for us all. It is surely time to strengthen our common foundations and build a more sustainable financial and social culture for the future.

Lord Blyth of Rowington: My Lords, since the present Government came to power in 1997, I have consistently described their presentation of economic news as somewhat disingenuous. I spoke in your Lordships' House on 3 December 1997 when the then Chancellor had just removed the tax relief on dividends to pension funds, to which my noble friend Lady Noakes referred. Your Lordships will remember that the Chancellor described it as a tidying up of corporation tax. I said that it was nothing of the sort but a blatant raid on company pension funds. I recall I even put a number on it: £5 billion per annum. If we fast forward 11 years, the most dependable set of pension funds in Europe are no more. Nearly all final salary schemes are closed to new members, and the cost of this tidying up is put by most experts at £200 billion, so I seriously underestimated. Meanwhile nothing has been done to tackle the huge drain on the economy of the final salary schemes of local authorities, civil servants and, if I dare mention them, Members of that other place. It was a £200 billion piece of disingenuousness. The list of other examples is long—very long: welfare to work paid for by windfall taxes; the 1p rise in national insurance to invest in the National Health Service; a 10-year delay while the number of permanently medically disabled people out of work all but doubled; and now, or at least, last week, we have a plan to tackle that problem, but only a plan.
	I could go on, but I would like to highlight two particular pieces of presentation that should not go unchallenged. We are told that the present economic crisis—it is indeed a crisis—is international in nature and that therefore the UK had no opportunity to escape any of it. The implication is that it is no worse for us than for any other country. That is not the case; it is worse for us. The US and the UK will prove to be the greatest sufferers from the housing market bubble. I put it to your Lordships that the UK will suffer more than the US; that is precisely why the pound is falling against the dollar.
	The huge amount of churn or remortgaging in the market, coupled with the availability of 120 per cent self-certified mortgages, is already causing hardship and will cause hardship on a scale that will not be seen in other European markets. Consider a simple sum. If you took out a 120 per cent mortgage, spent the 20 per cent a year ago and the value of your house has dropped by 20 per cent in that year, you are not in a 20 per cent negative equity trap; you are in a 40 per cent trap. There is no economic bounce around the corner that will rescue you from that any time soon.
	Why were those pernicious lending practices allowed to go unchecked by regulation? Much has been said on that already: partly because no one appears to have been quite sure whose job it was to check them; but partly because it suited the Government very well to have people believe that their house represented of itself a pension of sorts. The whole problem has been compounded, again unchecked, by the growth in the buy-to-let market. In the relatively prosperous city of Leeds alone, I am told that of 5,000 new-build apartments, 1,000 are either unlet or unsold.
	Let me lead your Lordships across the water to the great state of Texas. Your Lordships will remember that Texas suffered horribly from the savings and loan crisis of the 1990s. What did it do? It passed a law that said that you had to have 25 per cent of the equity in a property even to get a mortgage. Texas will come out of this relatively unscathed, and so could we have done.
	The last piece of disingenuousness that I would like to expose is the Government's plan to borrow and to spend our way out of recession, instead of dramatically cutting interest rates and costs. The first thing to say, which, again, has been much commented on, is that that is a return to 70 year-old Keynesian economics. The second is that the Government have not a clue whether it will work. I suspect that it will not, for several reasons. First, our national debt is already at record levels and the decreasing value of the pound against other key currencies is set to cause the cost of increased borrowing to rise significantly. Secondly, as has been said, time is not on the Government's side. Infrastructure projects such as those described by Mr Darling take years to plan and, with our completely unimproved planning system, even longer to plan and much longer to implement.
	If I sound like a prophet of doom, I apologise to your Lordships, but Britain has already slipped to sixth in the GDP league table behind the USA, Japan, Germany, China and France. I suspect that that plan will drop us below Italy.
	The Chancellor said on television last week that a precondition of the rescue package for the banks was that they should lend at the same rate as they did in 2007. The use of the word "rate" gives him some wiggle room, but not a lot. The economic conditions of 2007 are no longer with us. Businesses—builders, for example—which may have been perfectly good lending risks then no longer are. Had the noble Lord, Lord Myners, still been with us, I should have asked him, because I know him to have been an extremely prudent banker, whether he would agree that it would be imprudent to lend to such businesses and that it is therefore impossible for the Chancellor to fulfil his promise.

Lord Haskel: My Lords, as other noble Lords have said, the past few weeks have seen some extraordinary events, which will impact on the lives of us all. So I welcome this debate to try to understand better what needs to be done to ensure that we all get through the difficult times ahead. First, let me deal with the politics. Noble Lords opposite say that this crisis is the Government's fault because, as the Minister reminded us, we did not fix the roof when the sun was shining, or share the fruits of growth, or put something aside for a rainy day. This is sloganising; it is not a serious attempt to get to grips with a difficult situation.
	This is largely a financial crisis, which was caused by mistakes and misjudgments made in the financial sector. I think that the mistake was for the financial sector to think that it no longer needed properly financed institutions to carry risk and that the market could do it. To a large extent, we all believed that. But when this was tested and carried to excess, the whole thing collapsed, which is why the Government were absolutely right to recapitalise the banks. We need institutions with capital in reserves to carry financial risk for business and for the public. We cannot leave that to the market. Someone famous said that the first responsibility of leadership is to define reality, which we did and we acted. No amount of moralising, sloganising or interventions by noble Lords opposite is a substitute for understanding the reality and acting.
	Where do we go from here? Certainly, we should move towards better regulation and supervision to stop this happening again, and to save the financial sector from excess and its own inadequacies. This must be done in the open and not in the dark. Regulators will have to be able to impose heavy penalties if timely and accurate information is not provided.
	If we are not to end up in the bizarre world of Sarbanes-Oxley regulation, one matter has to be resolved. For many years, we have known that there are two types of shareholder. First, there are those who treat their shares as a financial instrument to be traded, on which the right reverend Prelate spoke, and, secondly, there are shareholders who see their shares as something to be nurtured and protected over the longer term. Both are important, but they are not the same.
	This conflict has been well spelt out by Tomorrow's Company in its recent paper, Tomorrow's Owners, which puts it that the financial ownership role of shareholders now far outweighs the stewardship role of shareholders and that unless it is brought back into balance, our economy will suffer in both the financial sector and the real economy. If the rights and duties of stewardship are equally balanced with the rights and duties of ownership, less regulation will be required, especially for banks, which is the concern of most noble Lords who have spoken.
	Last week, in his maiden speech, the Minister spoke of the benefits of good governance and effective regulation, and how he would like to continue to promote this in his ministerial role. Recently, the Prime Minister spoke of the need to address fairness, stewardship and co-operation in our financial system. It seems that they are speaking of morality of ownership in our financial system, which needs to be addressed. I put it to the Minister that a time of crisis is the time to address it, because renewal often emerges from crisis.
	Meanwhile, the Government have to do what they can to keep the economy going. I welcome the pressure that the Government are putting on banks to provide credit to small and medium-sized enterprises. I welcome the help from the European Union and I agree with the noble Lord, Lord Bilimoria, that this is not enough. But lenders have to be given some discretion. It is no use insisting that they lend to businesses that are basket cases because we are only postponing the inevitable and repeating one of the errors that got us into this mess in the first place.
	The noble Baroness, Lady Noakes, said that we should nurture the economy. I would like to see nurturing that will not only retain jobs and keep businesses going, but help to transform them. So I agree with the noble Lord, Lord Newby, that it is right that we should continue to encourage skills training, and indeed enlarge on it. We know that without skilled personnel, our position in the global economy is threatened. I urge the Government to implement the Education and Skills Bill currently in your Lordships' House. We must extend education and remove barriers to further learning, encourage both new skills and upskilling. All this must help people stay in work and benefit our economy. There may be some dispute over the need for compulsion, but there is certainly no dispute over the objectives. In spite of this crisis, I hope that the Government will continue to invest in and encourage skills training and education.
	The noble Lord, Lord Newby, spoke of balance. With the inevitable decline in financial services, manufacturing will have an important role to play in achieving balance in the economy—and it can do this. Manufacturing is rapidly learning how to operate in a market that demands less waste, less cost and less energy but more variety, more complexity and more technology. The same argument therefore applies: we have to continue our investment in science and technology. Fortunately, we have doubled our investment in science during the past 10 years. The Technology Strategy Board is working. Knowledge transfer networks are speeding up the process of innovation, and I declare an interest as president as the largest of them, Materials UK. We are facing up to the problems and opportunities of decarbonising our economy. The Foresight programmes have identified areas of great promise. We must be benefiting from all this investment and work, so it would be wrong to waste these efforts by cutting spending, because again it is spending that will not only keep jobs and businesses going, it will also transform them.
	I hate to quote Keynes again, and I am sure that eminent economists in the Chamber will correct me, but I think it was he who said that the major barrier to developing new ideas is escaping from the old ones. Let this crisis encourage that escape. Noble Lords opposite say "don't spend"—the noble Lord, Lord Blyth, just said so—and that instead we should reduce taxes. That may help companies in the short term, but the spending I have outlined will help companies keep going while at the same time help to transform the economy. In the end, it is that transformation which we must achieve. I urge the Government to continue borrowing, but to explain why very well.

Lord Howe of Aberavon: My Lords, I feel rather disturbed by the fact that people say to me from time to time that, as a former Chancellor of the Exchequer, I must have the answers to all these difficult questions. It is particularly disturbing when I am in the company of two of my successors, both young striplings for whom the memories are still quite recent. It is worth reminding your Lordships that I was first exposed to these problems 35 years ago when I was a junior member of the Heath Cabinet as Minister for Consumer Affairs. Every two or three weeks I would answer a Private Notice Question about one or other secondary bank that had gone down the week before in what I call the Keyser Ullman era. It is now 25 years since my last Budget and since I last presided over the IMF Interim Committee.
	However, much about today's crisis is unlike what we faced then. One big difference is that, in those years, inflation was one of the most overwhelming and dominant issues we had to face. I was criticised widely for a Budget of rash extravagance in taxation increases which enabled me to reduce the borrowing rate from 14 to 12 per cent, but the late Edmund Dell subsequently said in a book that I was not tough enough because within three months, a week or two before the Tory party conference, interest rates had to go back up again to 16 per cent. But all that is in the past. In today's circumstances, I endorse what has been said by a number of noble Lords in respect of the case for reducing interest rates as one of the components that is essential to the future. We cannot neglect inflation—one has to have it always in mind—but it is the first big difference.
	The second big difference is the way in which tales like Keyser Ullman seem like chickenfeed alongside the widespread collapse of confidence in banks and financial institutions generally, an issue on which many noble Lords have already spoken. That is something in which the two Anglo-Saxon major economies have led the way, if that is not too kind a way of putting it. Other noble Lords have explained the reasons for the extent to which sophisticated derivatives have been used for purposes that managers hardly understood and, above all, there has been inadequate oversight of the banking industry and associated institutions, certainly in this country.
	This is astonishing in retrospect because we had a pattern for oversight of the banks in the old days which appeared to work. There was an osmotic contact between the Bank of England and the financial industries generally. I found that when the Board of Trade—the Department of Trade and Industry—was unable to tell me anything about the banks that were closing down, although it was not long before that they had been given a Section 123 certificate of their legitimacy, the Bank of England always knew enough about it to get it right or nearly right.
	What has happened since then in various stages is that, first, there was the establishment by my noble friend Lord Lawson of the Board of Banking Supervision, and then its disappearance. Alongside that, there was the abolition of 10 separate institutions for the oversight of the financial industries and their merger into one body, the FSA; and the disappearance of the Building Societies Commission, a body with which the industry was familiar and whose oversight was constant by people who knew what they were talking about. This was exemplified and described in an article written by Ian Hay Davison in the Spectator on 16 April showing how he was able, as chairman of a newly shaped board, to deal with the collapse of the National Mortgage Bank in 1992. In those days, that was done by quick, clean-cut and confidential procedures. Within little more than a week, the Bank of England had assembled a consortium of 26 banks, with substantial sums of money to back them up, and old board members were replaced. Within a week or two of the news of the disaster, the remedies were in place to handle it properly and they came to the right effect. I shall not go into details because others have done so already, but there has to be a huge change to restore a far more effective surveillance of these industries.
	The other feature has been the way in which, as many have already pointed out— notwithstanding the bold proclamations of the Prime Minister, as he now is, in respect of prudence and so on—prudence disappeared from the agenda of this Government five or six years ago; Budgets have been in deficit since then. Likewise, the 40 per cent ceiling on the scale of borrowing is being swept aside as we speak, and there is great reason to be fearful if that continues as it now is. In respect of that, I align myself with what others have said: we have to install a sensible and effective mechanism for the oversight of folly and worse than folly in an industry as important as the banks.
	We have to maintain the discipline necessary in respect of public spending. Figures produced by the Institute of Fiscal Studies, quoted by my noble friend Lord Ryder of Wensum in the debate in this House on 18 July, showed that between 1979 and 1997 the public sector took 30 per cent of growing economic resources and the private sector 70 per cent, but that from 1997 to today that ratio has shifted dramatically and the state now takes 46 per cent and the private sector a much smaller share of 54 per cent. That is the long-running fundamental malaise on which, aside from the incompetence that I have already referred to, many of my noble friends have concentrated their attention. My noble friend Lady Noakes presented the case as comprehensively as we could have wished to have seen.
	That is why one can have so little confidence in the record and likely performance of this Government. It is not a bad thing that they have at least begun to recognise the need for some effective action, but do not let us believe that we will be anywhere near out of the woods for many months to come.

Lord Powell of Bayswater: My Lords, I draw attention to my declaration of interests in the register. I congratulate the Minister on his appointment; we served together on a board in the 1990s, and I know him to be a robust and resilient character who will not be the slightest bit dismayed by this afternoon's quite modest parliamentary assault.
	Most of the speakers so far have focused on the impact on the UK economy. I want to range a bit more widely and look at the broader international impact. None of us yet knows how deep the economic downturn is going to be or how long it will last. You sometimes hear it said that it is just another recession of the sort we are used to; it will last four or five quarters and then we will be recovering by the last quarter of 2009 or early 2010. That is surely too optimistic. Almost anyone in business will tell you that it feels worse than that, and it is going to get worse still. At the other end of the spectrum, some people refer to it as a once-in-a-century event. President Bush, talking about the US economy, said in his inimitable style:
	"This sucker could go down"—
	which can be more politely translated as, "We may be heading for a slump".
	Is it going to be that bad? It should not be, given that we now have more sophisticated policy instruments than in the past and much better international co-operation. However, we do not yet have a clear view of the scale of the overhang of fiendishly complex credit derivatives, credit default swaps and other instruments that still have to be unwound. All that one can really say is that, first, the damage to our western economies is already substantial and it is going to get worse before it gets better. Secondly, it is affecting not only the UK, the United States and Europe but just about everywhere. I have visited seven countries in the past two weeks, ranging from Brazil to China and the US, and everywhere I have found pessimism about the prospects. The idea of "decoupling" simply does not work. Thirdly, we are still at an early stage of the crisis. It is far too soon for any self-congratulation about saving the world financial system.
	In fairness, we must allow the measures already taken time to work through. Action to recapitalise the banks has gone some way to stabilising the situation but it is probably not enough, and more government money will be needed as the crisis continues to unfold. Normal lending has not resumed; companies, particularly small ones—I agree very much with the noble Lord, Lord Bilimoria—are still finding it extremely hard to obtain credit. The impact on insurance companies and on credit card issuers has yet to be fully felt. As poor company results come in for the fourth quarter of this year and beyond, they will add to the difficulties, leading to mounting job losses and bankruptcies. Beyond that, we have to expect that some countries in eastern Europe, in Latin America and possibly even closer to home will buckle and renege on their debts. That is the gloomy scenario that, in all probability, still lies ahead of us.
	I shall reflect for a moment on some of the possible wider implications of the crisis and how we should respond. One is the issue of direct government involvement in business. It is fashionable at the moment—not without justification, in some areas of banking and finance—to talk of the excesses of the free-market system. Clearly there is going to be a backlash after the crash, and it will probably go too far; in fact, that always happens. But before people get too hung up on the evils of the free market, it is worth recalling the disasters inflicted on our economies and our well-being in the past by nationalisation, public ownership and government interference in business. I really cannot imagine that anyone wants to go back to that. Yet there are increasing demands, in mainland Europe especially, for more state intervention and more subsidies. I hope very much that the United Kingdom will fight a strong rearguard action in Brussels to ensure that the European Union's competition laws remain firm.
	Similarly, we need to make sure that increased regulation does not go beyond the prudent to the punitive and simply increase the cost of capital, thus hampering rather than facilitating the recovery of the economy. While it is good news that Governments are co-operating internationally in response to the crisis, we should not confuse process with substance. You can reach bad solutions multilaterally just as easy as nationally. We do not need vast new bureaucracies for regulation, but simple principles, adopted internationally, and applied through clear rules at national level.
	Another risk is that the present crisis will give globalisation a bad name and set countries on course to erect new barriers to trade and investment. Shamefully, one is hearing echoes of this in the US presidential election campaign, particularly in relation to trade with China, but also in parts of mainland Europe. "Beggar my neighbour" policies only worsened and prolonged the great depression of the 1930s. We have to avoid that. Trade is the way out of recession, and although the climate is not exactly propitious, an attempt even now to breathe life back into the Doha round is worth considering.
	Then there is the impact on the world's poorer countries, which is only just beginning to be felt. If foreign investment slows or is withdrawn and export markets decline or even close, the considerable progress made in recent years in lifting millions out of poverty will be halted or reversed. The consequences of that are stark in themselves but also as breeders of turbulence, instability and extremism—and, at worst, fresh conflicts.
	I have a specific point on China, which I visit frequently. China showed commendable steadiness in the Asian economic crisis in 1997, refusing to engage in competitive devaluation. Like every other country, it is feeling the effects of the spreading recession, and they will be severe for a country which still ranks only 121st in the world in per capita GNP. But because of prudent financial policies, China has the means to expand domestic consumption and invest even more in infrastructure; it has also announced measures to increase rural incomes. These measures should enable it to maintain growth at a tolerable level. It would be unrealistic to expect China to be the locomotive for global recovery, but it will be among the first to recover, and that will be positive for the rest of us.
	There are many other possible consequences, including widespread disillusion with our western model of society in the eyes of much of the world as a result of the wanton damage caused by the convulsions in our financial system. At the least, our failures may be quoted as an excuse for various sorts of authoritarianism and government control of economies.
	Our Governments are bound to be preoccupied with firefighting the immediate problems of keeping our economies afloat. Doing that effectively is crucial to minimising and avoiding the wider dangers and salvaging the reputation of our system. We must demonstrate that we can repair the damage without jettisoning the fundamentals of our free market system.

Baroness Shephard of Northwold: My Lords, I should like, in my turn, to welcome the Minister to the Dispatch Box. I feel sure that, coming to the House with his background, he will privately agree that this debate is already overdue, not least because of the degree of agreement among all noble Lords who have so far spoken about the urgency and seriousness of the issues facing the global economy. The situation has been described by Charlie Bean, deputy governor of the Bank of England, as a,
	"once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history".
	There is agreement on the scale of the issue, but there may be less agreement on how we in this country are placed to withstand some of the storm after 11 years of this Government's much vaunted and so-called prudent economic boom. The Prime Minister continued to assert until quite recently that he had abolished bust and with it the need to set money aside for a rainy day. The result of this hubris is that the UK now has to face this global crisis with the largest fiscal deficit in the developed world, with the exception of Hungary, Egypt and Pakistan. Even before the scale of the global crisis hit us, we had reached in the first half of this year the highest level of public borrowing since 1946. We are entering a recession—we have the Prime Minister's word for that. We face rising unemployment and continuing falls in the housing market. The last quarter has seen the sharpest fall in manufacturing confidence in 28 years—a point touched on by the noble Lord, Lord Bilimoria—and inflation is at its highest for 16 years. This is a gloomy situation.
	What confidence can we have in the Government's ability to get us through this? It is not as though there have been no warnings about the situation that we might face. One such warning came in 2005 from my noble friend Lord Griffiths of Fforestfach in a report for the Conservative Party, in which he stated that the scale of consumer debt made,
	"millions of households extremely vulnerable to shocks to the economy, both from fiscal mismanagement and external factors such as oil price rises, acts of terrorism and wars ... Credit is far too easily available in the UK".
	He went on to say that banks "market credit too aggressively". They also protect their own risks but not those of their customers.
	That report was far from being the only concerned voice. From citizens advice bureaux and churches to economists and men and women in the streets, many were the voices that expressed concern about debt, both household and national. Then and subsequently, however, the only people who seemed not to be worried were the Government and the banks.
	I have three questions for the Minister who will reply to the debate. First, as she will know, Conservatives have supported the recapitalisation of banks on the condition that regulation works efficiently and protects the taxpayer. It took, as we all know, the best part of a year for the Government and the FSA to admit that the regulation of Northern Rock had been faulty. The FSA recently had to apologise again, this time for its catastrophic failure to supervise the entire banking sector. How confident is the Minister that the Government and the FSA, which is their own creature, can provide an efficient regulatory system? How will the FSA achieve supervisory engagement—its own words—with the sector in the future and how will it prevent a repetition of its past ineptitudes?
	Secondly, the taxpayer will soon own a majority stake in RBS/NatWest, a significant stake at the time of going to press in Lloyds TSB/HBOS and, of course, the whole of Northern Rock. Last month, Stephen Timms MP said:
	"I don't think it would be a good idea for the Government to start managing Northern Rock or other institutions that we have taken shares in".
	Last Thursday, the noble Lord, Lord Davies of Oldham, who is in his place, said that,
	"the Government expect, particularly with regard to banks and the financial sector, an improvement in the relationship between performance and pay".—[Official Report, 30/10/08; col. 1684.]
	As we speak, the Government are rewriting repossession rules and saying what they expect from banks: moderate charges, transparent savings rates and so on. There is some ambiguity here, so will the Minister make it clear when she winds up just how much and in what ways the Government intend, or do not intend, to manage the banks? Given that a Times survey on 25 October reported that more than 40 per cent of people blame the Government for the financial crisis, and given the amount of taxpayers' money at stake, there are issues of accountability here, and it would help the House if she were to address them.
	Thirdly, there has been talk from Ministers in today's press of a return to Keynesian principles. We are being told that the Government will spend their way out of recession, but did not Keynes advocate spending in bad times the surpluses that Governments had built up in good times? We know that we have had good times, because the Government have told us so today. If that is so, where are the surpluses now? I hope that the Minister will be able to tell us.

Lord Smith of Clifton: My Lords, there can be no doubting the seriousness of the current economic crisis that the UK faces along with many other nations. Other noble Lords have spoken, and will speak, on the causes of the crisis and how best it may be managed. Which thinker we should now turn to for guidance, whether Marx, Colbert or Keynes, is a matter that I shall leave to others, except to say that it is unlikely to be Milton Friedman.
	Like the right reverend Prelate, I shall concentrate on the behaviour of the institutions that comprise the UK financial sector and those who have led them and contributed greatly to the present parlous situation. They bear great responsibility for what has happened and should be exposed and punished.
	Since 1997, many noble Lords, including me, have regularly questioned the Government about their policies towards the excessive remuneration packages received by the directors of large companies. Most of those were out of all proportion to what was merited and were received by competent, mediocre and very poor performers alike. Numerous studies revealed a weak correlation between pay and performance. The reward packages were not just a symptom of what was going wrong, but one of the direct and immediate causes that brought about the maelstrom that has been visited on the UK economy. Widespread corporate and individual greed and the wholesale looting of investors' money explain much of what has occurred.
	The famous American sociologist Thorstein Veblen analysed the rapacious behaviour of the owner-managers of capitalist enterprises in the late 19th and early 20th centuries, referring to them as the,
	"red in tooth and claw",
	robber barons with their displays of "conspicuous consumption". Later, in the years of Butskellism, we were assured that, with the divorce of ownership and control, the consequential managerial revolution would produce a new breed of directors who would put the naked pursuit of profit maximisation in a more socially responsible context. They would recognise the legitimate claims of other stakeholders, including employees, neighbourhoods, the environment and wider society. It did not last long. Reaganomics and Thatcherism gave the all-clear to directors to emulate the robber barons of yesteryear, although this time they would do it with other people's money. We shall await the assessment of a future breed of sociologists and historians as to how this occurred and was allowed to continue for so long.
	When questioned in this House about the overgenerous remuneration of company boards, the Government were complacent in their response and revealed almost no awareness of what was going on. Perhaps, in the words of the noble Lord, Lord Mandelson, they really did not care how "filthy rich" people became. Invariably, successive Ministers parroted that it was for company shareholders to deal with any excessive payments to directors. Belatedly, mild reforms requiring greater transparency were introduced, but it was all too little and too late. I stress that the Government were regularly alerted by noble Lords about the seriousness of the problem, but to no avail.
	The Government now say that in return for bailing out the banks they will insist on more modest levels of executive pay and that the Financial Services Authority will monitor the situation and see that it is complied with. My honourable friend Dr Vince Cable, who alone among politicians predicted the coming of the present crisis, recently observed that the Royal Bank of Scotland had no intention of curtailing directors' pay and bonuses and was "making monkeys" out of the Government as a consequence. It has been asked whether the motive behind Barclays Bank's preference to pay over the odds for funds from the Gulf states is to avoid any government constraints on directors' remuneration. The truth is that, whether or not they have accepted government money, the banks seem hell-bent on carrying on much as they did before. In the light of that, I ask the Minister in winding up to state precisely how the Government will prevent the banks from flouting their expressed policies.
	Jeremy Warner, in his column in the Independentlast Friday, commented that in the United States corporate wrongdoing and excesses are subject to severe formal investigation and prosecution. The UK Government and regulators seem much less resolute in this respect, as the noble Lord, Lord Owen, speaking on "Straight Talk" over the weekend, reiterated. It really is not good enough. The guilty must be named, shamed and punished. The Serious Fraud Office should be closely scrutinising the activities of failed banks.
	As the UK seems to be moving, regrettably but inexorably, towards becoming a totalitarian state, where vast sectors of industry and commerce are owned by the Government and the rest owned by French nationalised industries, and the whole of society is subject to total government surveillance, the future seems dismal. The growing gap between rich and poor may, in the circumstances of a collectivist state, give rise to a populist demand that other totalitarian methods be employed.
	Perhaps I may be allowed a moment of whimsy. It could well be that Mr Arthur Scargill is asked to preside over a people's tribunal to flush out, in short order, say, the 50,000 people most responsible for the present crisis among the banks, rating agencies, hedge funds, auditors, private equity companies and the like; after all, he has a nose for sniffing them out. In such an eventuality, I hope that he would be parsimonious in his use of military firing squads, although I accept that some examples may have to be made. The rest should be served with ASBOs, requiring them to be in the stocks every Saturday for three years, to be pilloried by the jobless and homeless, and on Sundays forced to help to deep cleanse our hospitals. Of course, such punishments would do little to restore the nation's fortunes but, at a time of widespread gloom, they would add a little gaiety and would be immensely popular. To avoid such a scenario becoming reality, the Government must act to arraign those guilty of malfeasance.

Lord Lamont of Lerwick: My Lords, I join others in congratulating the noble Lord, Lord Myners, on his post and his arrival in this House. He and I were colleagues many years ago. He has a most distinguished career in business. I hope that I will not be giving away any secrets—I am sure I am not—if I disclose that he regards himself as old Labour. However, as a very successful businessman, we none the less entrust him and trust him with the policy towards the banking sector, and we look forward to hearing him again.
	This is a very different recession from others we have experienced since the war. It is different in two particular ways. First, previous recessions have, to some extent, related to policy. They have been slowdowns that have often happened when Governments have felt it necessary to regain control of inflation. This recession is more of a market-driven recession. It is, pace the Prime Minister, an old-fashioned boom and bust recession. The fact that it is a cyclical recession does not mean, though, that it will be any easier to deal with or that recovery will be quicker.
	The second way this recession is perhaps different from other recessions since the war is that it has been accompanied by a very serious banking crisis indeed; more serious than the previous secondary banking crisis and probably the most serous since the 1920s and the 1930s.
	The banking crisis has caused many people to talk about a return to the 1920s, the 1930s and a depression. I do not believe that the crisis will go that far. Policy is more accommodating than in that period; the banks have rightly been rescued; and I do not believe that we are heading for 20 per cent unemployment or a 15 per cent fall in GDP.
	I want to concentrate today on the Government's relationship with the banks. I want to talk about three issues—transparency, lending and pay, although in a rather different tone from the noble Lord, Lord Smith. The Government find themselves likely to be the major shareholder in the Royal Bank of Scotland, a significant minority shareholder in Lloyds TSB and HBOS, and the only shareholder in Northern Rock and Bradford & Bingley. I am not an admirer—surprise, surprise—of state involvement or stakes in banks. As far as I am concerned, the sooner the Government can get out of their holding in the banking sector, the better. I am encouraged by what the Chancellor of the Exchequer has said about that.
	It is interesting that Barclays bank, with its injection of capital from Middle-Eastern investors, has been prepared to pay no less than a 16 per cent coupon in order to be out of the Government's clutches. Some regard this as something to be criticised. I do not regard it as such in any way. It is a commercial judgment for the shareholders of Barclays.
	I say as forcefully as I can that I hope that the Government, in their new position as shareholder in these banks, will use their influence towards the maximum, earliest disclosure of losses on complex derivatives, sub-prime securities and all the other types of assets that have caused such problems. It was the failure to disclose early on that made the Japanese banking crisis much worse. For all the Government's helpful and correct intervention in the inter-bank market, we will not get banks lending their own money to each other—as opposed to the Government's money, or with the Government's guarantee—until there is a full understanding of what must be disclosed and what losses have been made.
	That is linked to International Accounting Standard 39 and "marked to market", as opposed to holding securities to maturity or as available for sale, thus influencing whether losses go through the PNL or just remain on the balance sheet. The accounting standards authority has allowed some new flexibility in this. Deutsche Bank has recently been the first to avail itself of this new flexibility, and has consequently been able to make a €180 million saving, thus turning a loss into a profit. I read that the Royal Bank of Scotland—RBS—in which the Government have the majority shareholding, will do the same.
	I am not saying that that is wrong; it is not an issue on which I feel competent to make a judgment. However, I urge the Government to ensure that the basis on which these losses are disclosed is crystal clear, and that the maximum pressure is put on the banks to reveal the maximum losses as quickly as possible. Whether an asset is valued at $100 or $600 does not alter the cash a bank has, or how much it owes and has to repay. Maximum transparency is extremely important.
	Secondly, my noble friend Lord Blyth referred to lending policy and government influence on lending. We do not want political lending from the banks. It was not encouraging to read that, within a short time of the stakes being taken in banks, pressure was being put on them to participate in the Government's shared equity scheme to a larger extent that the banks had wanted. As my noble friend forcefully and rightly pointed out, it is easy to say that lending should be maintained at 2007 levels. Actually, the Government's wording is very precise: the "availability"—not "lending"—of lending will be at 2007 levels.
	While bearing in mind the needs of small businesses—which I understand well; I experienced them at first hand—we have a serious need to repair banks' balance sheets. We must not have the banks being forced into a new series of problems thanks to political problems. RBS had its whole profit of £5 billion wiped out in the first half of this year because of the impairment losses. It is extremely important that the balance sheets should be rebuilt.
	Lastly, it may be surprising for a Conservative to mention pay. I do not think that the level of pay is the issue; it is the structure of remuneration packages and the alignment of pay and risk which has sometimes been wrong. Too many bonuses have been paid on a short-term basis, whereby people have been encouraged to take large bets. Sometimes, they have been given extremely large rewards and have walked away leaving chaos behind them. There has to be a closer alignment between remuneration and risk management. There has not been a close alignment and that has contributed to the present situation.
	I agree with many of the points that have been made more generally. I do not think that we are better positioned at the beginning of this recession than we were in the previous one. We go in with a weaker position in terms of the current deficit in the public accounts. We should have put more aside in the good years. There has been a failure of regulation. The Government's own fiscal rules are in tatters. The distinction between capital and current was always dubious and the rules were always open to criticism because the Government were able to define the length of cycle themselves. We face a very painful period, but I am sure that we will get through it. If there is any consolation, it is that which Joseph Schumpeter used to offer; namely, "It is in recessions that economies recreate and reinvent themselves". I am sure that we will come through it stronger in the long run.

Lord McIntosh of Haringey: My Lords, I have two disqualifications for intervening in this debate. First, my great-grandfather was a blacksmith in Blairgowrie. As the Scots know, the Carse of Gowrie has a very clement climate and provides a lot of the soft fruit which is sent down to Dundee to make jam. My grandfather, like many others who were not involved, used to speculate on the raspberry crop. If the raspberry crop was good, he used to buy it up in advance, and he and his family did very nicely over the winter. If it did not do well, I suppose noble Lords on the Conservative Benches would say that it was all Gordon Brown's fault, given a century or two of décollage.
	My second disqualification is that I was chairman of the Select Committee on Regulators, and we got it all wrong—it is no consolation to me that nobody else got it right either—because we pursued almost trivial objectives rather than realising the real crisis in regulation which is now upon us. Noble Lords have referred to the Royal Bank of Scotland. I remember that bank saying to us that the problem was that regulation in Britain was one of the most onerous in the world and that that threatened competitiveness. We finished our report before Northern Rock's situation came about. Since then, it has not needed me to criticise the FSA; it did it very thoroughly itself in its internal audit in February this year, and in Hector Sants's response to that. John Tiner, the chief executive of the FSA, said in evidence to us that our regulation contrasted very favourably with the USA's very severe rules-based and inspection-based approach. That did not work very well either, but I do not think that it was much of a defence of the FSA.
	So what went wrong not just in this country but with capitalism anywhere in the world? There was a fundamental misunderstanding of the nature of risk. Alan Greenspan said in 2005 that the increasingly complex financial arrangements meant that the markets were more flexible, more efficient and hence more resilient than those which existed just a quarter of a century ago. I remember Alan Greenspan dining in the Treasury five or six years ago and making, as usual, a very opaque speech. Like most people, I did not understand it, but I thought I saw in that speech a defence of hedge funds, and I thought at that time that was wrong. Some people got it right, or came close to understanding. Oddly enough, the financial stability report of April 07 was perceptive. Members of the Select Committee did not read it, but we ought to have done. It stated that,
	"macroeconomic stability is encouraging greater risk-taking".
	However, it went on to say that those who assess risks are,
	"less inclined to assess credit quality ... if they bear less of the ultimate risk".
	That backs up the point that the noble Lord, Lord Lamont, made that transparency is a prime requisite. The problem with transparency is that even if those responsible wish to be transparent, they do not really understand the risks themselves.
	What will be done about better regulation? I hope I do not need to say that as regards the wider field of macroeconomic policy I agree with the Prime Minister, and so does everybody else in the world except those on the Conservative Benches. However, that is not an issue with which I shall concern myself today. Certainly what the financial services report now calls "macroprudential"—a word I did not know—means that, contrary to everything that people were saying to us only 18 months ago, we must have much more regulation and much more intrusive regulation, which must be undertaken globally.
	The financial services report of October this year reaches the very valid and very discouraging conclusion that the remedies which are necessary in the short term for the banking system will be severely detrimental to the real economy. The financial services report says that in the seven years 2001-08, there was £700 billion more bank lending than saving. That bank lending was financed with securitised assets, which were insured by credit default swaps. The point about that is not the deliberately obscure language but the fact that these figures are very much greater than anything which Government can put in to deal with the problem. If there was an undesirable increase in balance sheets—and there was—shrinking balance sheets will be a very painful process because banks are different from the real economy, although they very much affect it. Financial markets are inherently unstable. They involve speculation which is sometimes skilful, like, for example, studying racing form, or may sometimes be based on a real misunderstanding of probability, like gaming. You cannot pick them apart in the way bankers think. They do not understand the difference between skill and luck, and we are all suffering as a result.
	Therefore, I am afraid that we are only at the beginning of being able to decide what should be the future of regulation. Matthew Parris said:
	"The market must be the engine of our economics and therefore our politics. That argument is over. But now another starts. What about the accelerator, the brakes, the gearing, the emissions control?".
	That is a big challenge for us.

Lord Forsyth of Drumlean: My Lords, I say to the noble Lord, Lord McIntosh, that it is possible for regulation to be onerous and useless, and that is what we have experienced to date. I am delighted that we have the opportunity to have this debate. However, it is a great failure of Parliament that the House of Commons has not had such a debate. I thought that Parliament was about controlling supply. I thought that Parliament was about holding the Executive to account for the resources they spend. Here we have a Government committing £500 billion—is that right?—of taxpayers' resources and there has not been a debate in the other place, which is so jealous of us discussing means of supply and taxation.
	I welcome the Minister to his new role, and I am in no way criticising him, because he is new to his role. But what on earth is going on in his department when it sends him here with a speech that does not actually deal with how that £500 billion is being spent, or its conditions? Instead, we had a somewhat biased view of what the former Government did, what the rest of the world is doing and what is happening on the international stage. I want to know what is being done with that £500 billion of our money. If I may, I shall ask some specific questions.
	First, I very much welcomed the Minister's promise to this House that there would be a full inquiry into all of this, including the conduct of the Government, the banks and the regulators. We need to know about that so that we can learn from that experience. I want to take up the Minister on the point that the persistent leaks from the Government are a matter for inquiry by the FSA. I shall not name the person, but I spoke to a non-executive of a financial institution, who told me that he could find out better what was going on from reading Robert Peston's blog on the BBC website than from what he was being told by the Treasury. I see the noble Lord, Lord Peston, nodding in agreement, and I make no criticism of his offspring, who shares his undoubted abilities.

Lord Peston: My Lords, I want merely to point out, in reference to a first-class journalist who gets his stories perfectly legitimately, that we do not need an inquiry. We just need to have excellent journalists doing their job properly.

Lord Forsyth of Drumlean: My Lords, I do not need an inquiry into the conduct of Mr Peston, but I should like an inquiry into the conduct of those people who gave him and others information that was market sensitive. Because it was leaked into the public domain, it did enormous damage to the savings and investments of people in this country.
	I find it absolutely extraordinary that the Prime Minister can call from the Dispatch Box for an inquiry into my right honourable friend visiting a boat on his holiday, but he does not see any need to have an inquiry into the leaks that we have seen not just with respect to the bail-out but also in respect of the Bradford & Bingley and Northern Rock. The run on Northern Rock was started because the BBC told us that Northern Rock was in discussions with the Bank of England about getting financial support. The Government are not only incompetent but incontinent.
	Secondly, on dividend policy, it seems to me that one of the things that we should be doing is encouraging people to save. We have already heard that the savings ratio has fallen close to zero. What message are we sending to those people who have done the right thing and who bought shares in the banks, believing that they were regulated and that they were safe and that the banks were a source of income because of their dividend policy, when the Government come along and use that taxpayers' money to bail out the banks and insist that the banks pay no dividends for five years? The Minister is shaking his head. That is what the Government said in the beginning, and then they changed their mind. Then they said, "Perhaps after one year there might be a change". Now, they are saying, "Actually, if you pay back the preference shares you will be allowed to pay dividends".
	The effect of that is to make those shares less attractive to investors and less attractive to those savers. That will mean that the taxpayers will end up with a bigger slice of Lloyds TSB and a bigger slice of Royal Bank of Scotland. What is going on here? I understand why the Government might not want taxpayers' money to be put into the banks and then paid out as dividends but, as the Minister will no doubt confirm in her reply, the FSA already has the power to stop the banks paying dividends if it is not prudent to do so. So why the spiteful requirement in respect of dividend policy, which damages the interests of savers in this country and makes it less likely that the banks will have a larger share of ownership from the private sector as opposed to the state?
	The third issue that I shall pick up on—political interference—has been mentioned by my noble friends Lady Shephard and Lord Lamont and the noble Lord, Lord Powell. We have already seen it. What assurances are we going to have? Can we have an assurance that the members of the boards of the banks where the state has taken a substantial shareholding will be appointed by the banks and not by Ministers? We do not want to see any more Labour donors appearing on the boards of those banks. We want the people on the boards of those banks to be appointed by the banks, subject to approval by the Government.
	Equally, we are getting mixed messages. We have heard from the Liberal Benches how the Government ought to use their position to do this or do that. If the Government are going to interfere in the banks, it will make them less competitive. I have a question about the FSA and capital requirements. Why was Lloyds TSB asked to have a capital requirement, as were the other banks, which was set by the FSA and which was different from that for Northern Rock or for the Bradford & Bingley? How can our banks be competitive if they have a core tier 1 capital requirement that is higher than those of their international competitors? On the subject of the preference shares, why are our banks being charged 12 per cent on the preference shares, whereas France and Holland are being charged 8 per cent and 8.5 per cent respectively? Does that not make it harder for them to compete? Does that not make it harder for them to provide the money that we have been hearing that small businesses and mortgage-holders want?
	On spend, spend, spend, I say to the Government that it is obvious that tax revenues are going to fall off a cliff. We now need growth in revenues. How can we get that? What is the biggest source of possible income for the Government? It is PAYE. We need to stimulate the private sector. We need to encourage the private sector and give it some support. That means not going ahead with the increase in corporation tax on small businesses, to which the noble Lord, Lord Bilimoria, referred. The Government need to cut their own spending and cut their own cloth in the same way as every family and business in the country is doing.
	My right honourable friend the shadow Chancellor has talked about sharing the proceeds of growth. Now there is no growth. There is only negative growth. So why are the Government not taking their share of pain and giving some of the money back that they have taken from people in the good times, to cut taxes, to encourage growth, to encourage free enterprise and to reverse the terrible damage that has been done by the Government through their policy of spending more than they had in tax revenues and borrowing the rest?

Lord Taverne: My Lords, I believe that one lesson of the credit crunch is that we should look again at the case for joining the eurozone. It is not an issue that has been raised in this debate, although it was raised in today's Financial Times. The arguments today are different from those of 10 years ago, because circumstances have changed, but they are very relevant to our present condition.
	First, we now face a crisis of stability and credibility. To avoid heavy unemployment, we need low interest rates and higher government borrowing, whether by way of tax cuts or further spending. Both of those will threaten sterling, which is now a highly vulnerable currency. If there were a collapse of sterling, with the threat of high inflation, it would cause the mother and father of all economic crises, especially since we have such a very high level of personal indebtedness; 53 per cent of all credit card debt in the European Union is in Britain. Membership of the eurozone would give us a certain security.
	The second argument concerns the future of the City as a world financial centre. That is mainly what I want to speak about. The question that we have to face is whether we can today successfully maintain the City's role as a world financial centre if we are not part of a major reserve currency area and do not have a central bank that can act as a lender or market-maker of last resort. The issue has been the subject of a fascinating dispute between two economists who I greatly admire; Martin Wolf and Willem Buiter. I find Buiter's arguments impressive and persuasive.
	Why did Iceland's banks collapse? They collapsed not necessarily because they were insolvent or badly managed, but because, like so many banks, they were overwhelmed by the unexpected liquidity crisis in all the world's wholesale financial markets. Iceland is a very small country that has a very large financial sector; it is huge in relation to its GDP. It is internationally active and internationally exposed. That need not have proved fatal, except that Iceland has its own currency.
	All banks are, in a sense, risky businesses, because they borrow short and lend or invest long. If all their depositors suddenly want their money back, they cannot pay, even if they are not fundamentally insolvent, since their long term assets normally exceed their liabilities. In the case of domestic banks, the central bank can act as a lender of last resort to tide them over, since it has the security of the value of their long-term assets. The central bank can rescue a perfectly sound domestic bank if there is, as at present, a crisis of liquidity. If necessary, it can print more money.
	However, a central bank can intervene as saviour only if it can lend in the currency in which liabilities have to be met. It cannot print foreign money. Iceland's banks borrowed and invested abroad in foreign currencies and incurred foreign liabilities on a massive scale, amounting to about 800 per cent of Iceland's GDP. Its central bank could not act as a lender of last resort in foreign currencies. The story would have been different if that country had been a part of the eurozone. The case of Iceland was not altogether unique. It is very likely that Ireland would have gone the way of Iceland if it had not been part of the eurozone.
	What about the UK? Financial services also form an important part of our economy, although not on anything like the scale in Iceland. Our financial institutions, too, have borrowed and lent or invested in foreign currencies on a massive scale, amounting to well over 400 per cent of our GDP. That compares with a figure of some 100 per cent in the United States and some 30 per cent in the eurozone. The Bank of England is not able to act as lender or market maker of last resort if UK banks cannot sell their foreign currency-denominated assets to meet their short-term foreign currency-denominated liabilities. They may not be able to do that because they cannot roll over their liabilities or because of the shortage of liquidity in international wholesale markets.
	The UK finds itself somewhere in the middle between Iceland and the reserve-currency countries—the United States and the eurozone. It can be plausibly argued that we are closer to Iceland because sterling is not a major global currency to speak of. We are very minor players on the global scene. On the other hand, we have far more credibility than Iceland, and, because of that, the Bank of England can get over the problem by arranging swaps and credit lines with other central banks. However, the cost of that is considerable. Having to rely on such arrangements will place the City of London at a competitive disadvantage. Is it a loss of competitiveness that the City can afford? What would happen if we lost credibility because of a collapse of sterling?
	Other countries which thought that they should preserve their economic independence, like Denmark and Sweden, are now seriously reconsidering membership of the eurozone. We now have to face the question: can we maintain a successful world financial centre without being a member of a major reserve currency area? If not, the only choice for us is the eurozone. Euros are likely to be a lot safer and more stable than pounds.

Lord Griffiths of Fforestfach: My Lords, I remind the House of my interests that are relevant to the subject, which are documented in the Register.
	The UK economy is in recession, inflation has risen to more than 5 per cent, unemployment is rising, house prices are falling and repossessions are increasing. This is causing great pain to many people and households in this country. I have no wish to detract from the seriousness of the present recession, but it is important to maintain a proper perspective. The media talk of meltdown and global collapse. In my judgment, we are not entering another great depression. Business cycles are endemic to market economies; they have been documented since the mid-18th century.
	The great depression of the 1930s, which followed the Wall Street collapse of 1929, was exceptional by any standards. Between 1929 and 1933, real output fell by one-third in the US and 10,000 banks went bust and, between 1931 and 1941, unemployment averaged 25 per cent. At present in Britain, unemployment is 6 per cent; if it increased to 3 million, it would represent only 10 per cent or 11 per cent. The US Federal Reserve through mismanagement reduced the money stock by one-third. At the same time, countries pursued beggar-my-neighbour policies through competitive devaluations of their currencies, the imposition of tariffs, import quotas and non-tariff barriers.
	Today, the situation is entirely different. The UK and US Governments have taken decisive action to deal with the banking crisis and it is clear that the action has had an impact. I applaud the Government for that. The Bank of England has accepted its role in maintaining financial stability. Central banks have acted in a co-ordinated manner by providing increased liquidity to the banking system. Countries are not pursuing beggar-my-neighbour policies. President Bush has called a meeting for later this month—the so-called Bretton Woods 2 meeting. I share the scepticism of my noble friend Lord Lawson about the outcome but, on the other hand, the meeting will consider a more appropriate regulatory framework.
	All those things should give us cause for hope, even in this difficult situation, especially when one compares it to the early 1990s, when inflation reached 8.5 per cent, mortgage rates were 16 per cent—they are now just above 6 per cent—and we were constrained in what we could do by our membership of the ERM. Although the present recession is painful, we have every reason to believe that we will avoid serious deflation and anything approaching a great depression.
	In these circumstances, what should the Government and the Bank of England do to try to reduce the scale of the recession without creating conditions for rising inflation in a few years? I suggest three measures. First, the Bank of England must cut interest rates now. This is a crisis and we need bold action. In my judgment, there should later this week be a cut of at least 1 per cent. At the same time, the Bank is right to be concerned about future inflation, because of the explosion that we have seen and are seeing in public borrowing. At some future date, the Bank will come under great criticism, because it will wish to protect the currency, and the Government will be forced to take the difficult decision to cut public spending, to raise taxes or to abandon its inflation target. That is an issue for the future. For the present, it is imperative that we cut taxes.
	The second measure relates to the banks. The noble Lord, Lord Forsyth, made an eloquent statement on this, as did other noble Lords. The Government were absolutely right to take drastic action last month to kill a banking panic. It was right that, when the Government rescued the banks, the shareholders should have borne a significant cost. However, I ask the Minister whether the draconian terms imposed on the banks at a time of financial emergency should be revised. The Government stopped the banking panic. The challenge is how to get bank lending to small businesses going again, as the noble Lord, Lord Bilimoria, reminded us. Asking the banks to lend is fine, but the more that you can align their commercial interests with government policy, the better. In my judgment, that means allowing them to pay dividends and removing many of the controls that are imposed on them. That, I think, would allow them to take better decisions.
	Thirdly, there is Treasury policy. Spending and borrowing will clearly rise in the recession. There is an urgent need to get back confidence and get money back into people's pockets. I doubt whether infrastructure projects are really appropriate, due to the planning, consultation and administration involved, but it seems to me that one thing could be done—whether within the existing framework or as a separate, almost Keynesian, measure—which is to cut taxes and, in particular, national insurance. National insurance is a tax on employment: it hits employers and employees. At a time when unemployment is rising, the announcement that rates would be cut in the Budget would give business one less reason to shed labour and employees one more reason for reducing expenditure less.
	In conclusion, we face a serious recession but not, I believe, a great depression. We must all, including banks, take responsibility for our part in creating it, but if the Bank of England and the Government act now, I believe that they can reduce the severity of the recession to the benefit of the whole nation.

Lord Peston: My Lords, one should never wish for anything because one's wish may come true. On the Tuesday after we came back from the Recess, I exploded with rage, demanding a debate on the economy, but was told by the Chief Whip that all the time in the overspill was dedicated to Ministers and that I should forget about it. Then, to my amazement, with virtually no notice, here we are. I have to tell noble Lords that there are nearly 30 more speeches to go and I am already exhausted. I am not saying that we have reached the point of negative marginal utility, but we cannot be far away.
	The world has been struck by a major shock, focused largely but not entirely on a banking panic. Our Government have reacted promptly and decisively to intervene and to mitigate its effects. They have acted in a non-doctrinaire way, as is indicated by support for aspects of the Government's policy from all round the House. It is interesting to see how the United States Government have acted in a similar way, as have leading members of the European Union. Most interesting of all is Professor Bernanke, the world's leading expert on credit and credit crunches. Professor Bernanke has intervened in the American economy in, again, a totally non-doctrinaire way. He was appointed by President Bush to be head of the Fed on the grounds that he was a dyed-in-the-wool monetarist, but he has had no difficulty at all in supporting the same kind of Keynesian expansionist policies as we have in our country. That is much to be applauded. If I may use an imperfect analogy, when the patient—in this case, the economy—is dying, you resuscitate him and argue about his lifestyle and what he should have done only when his life has been restored again. That is why the Government's policies have been absolutely necessary.
	Despite the intervention, we all agree that in the short term all the leading economies will go below their underlying rate of growth and some—notably the US and the UK—will experience negative growth. There is no doubt at all about that. Whatever the Government's intervention does, it cannot stop that happening or unemployment rising to some degree. That reality has to be faced. It is a double reality because, as has been pointed out, it is often the weakest and poorest who suffer the consequences, but that has to be accepted.
	In terms of predicting all this—by which I mean serious economic predicting and not people going around saying "Woe is me" all the time and then, when the worst happens, saying "I predicted it"—I can say categorically that I certainly did not predict what has happened. My view was that there would be a slowdown but I certainly did not predict, say, in May that a recession would occur. Right at the bottom of the blue fan chart in the inflation report of the Bank of England is something that means, "It's possible but completely unlikely that there will be a recession". However, that was not the mean position. The mean position was "clearly slowing down" rather than a recession. I did not get it right and therefore I do not criticise others who may not have got it right.
	The question that people keep asking me is whether the Government's policy will work. Because of the expectational effects—the uncertainties and the confidence problems—you cannot say for certain that it will. You can say that you hope that it will but you cannot say for certain that it will. Twenty-five years ago, Professor Bernanke devoted his PhD thesis to the effects of uncertainty on the economy. He demonstrated in some brilliant work that, if you get too much uncertainty, no policy whatever will work. I can only hope that we do not now have sufficient uncertainty in the economy to lead to that conclusion.
	In this connection, I notice that the newspapers, apart from discovering Keynes, have discovered Karl Marx. Karl Marx certainly believed that free-market capitalism would destroy itself, but he thought that the route to that would be via the class struggle. He did not believe that it would come about through self-destruction by the leading capitalists. So, in one sense, Marx may have predicted—I hope, wrongly—what was happening, but he certainly did not get the explanation right.
	If we get through the current crisis, what will happen next? I wish to make a couple of points in that regard. First, I shall mention the noble Lord, Lord Lawson, who referred to the need to raise the propensity to save. That enables one to focus on the difference between the short term and the long term. An increase in the propensity to save in the immediate future would be disastrous for the economy, because no one would want to borrow those savings and the economy would go not into a recession but into a depression. Equally, the noble Lord, Lord Lawson, is right that, once we get back on track—once we are at what I call full employment—it is vital that we increase the propensity to save. In that sense, we come to the other aspect—

Lord Lawson of Blaby: My Lords, I said that it has to happen because consumers' balance sheets need to be rebuilt. It may have an undesirable consequence but the savings ratio will go up simply by people not borrowing or getting into debt any further. Surely he agrees that that is going to happen.

Lord Peston: My Lords, the point that I am trying to make is that that is the medium-term solution that we should be aiming at, just as the Government's propensity to save also has to be put back on track in the medium term. However, in the short term, that is the last thing that we need. The trick is getting from the short term to the medium and long term.
	In the long term, the fundamental question is whether to go for less public expenditure or for raising taxes. I have tried endlessly in your Lordships' House to persuade the Official Opposition to stop waving their hands in the air and to tell me whether they are capable of taking serious decisions on the future of public expenditure. However, every time I ask them, they just wave their hands in the air. As I said on the wireless the other day, I assume that the present Government will be in power for the next round, when they will have to take some tough decisions on public expenditure. Equally, were there to be a national disaster and the Opposition became the Government, the idea that they would not have to take similar decisions is preposterous.
	I must come to a conclusion. I have not talked about the banks because I will be able to do that when we consider the Banking Bill and I have not talked about some of the detail on the short-term package because we will have a chance to do that when we consider the Pre-Budget Statement. Noble Lords can look forward to hearing me speak on both those matters.

Lord MacGregor of Pulham Market: My Lords, one problem with speaking at this stage of the debate—it must be far worse for those further down the list—is that so much of what one wanted to say has already been said. I have had to totally rewrite my speech. I agree with much of what my noble friends Lady Noakes and Lord Lawson said, but I shall not go over that ground again as I had intended to, except to make three brief points on what has gone before.
	First, of course, I recognise that the blame for the current crisis does not lie only at the Government's door. The Minister referred to the American background. I share the concern that the banking and financial communities are also culpable in that so many traditional banking practices were thrown out of the window in the search for greater market share, higher returns from ever more complex instruments and, yes, higher bonuses. I could never understand why securitising dodgy mortgages in a package made them less risky, as the underlying toxic nature of the ingredients remained the same. That was fine as long as the originator could sell them on quickly to someone else. The banks' risk models proved faulty when liquidity dried up.
	I also share the view expressed by the right reverend Prelate the Bishop of Chelmsford that one of the more unpleasant aspects of the whole situation is that top executives' remuneration packages allow reward for failure. I support the need for that to be addressed, as indicated by the Government and supported by the ABI recently. The role of the credit agencies, on whose ratings so many lending decisions were justified, is being reviewed. That is absolutely right and I look forward to the results.
	Secondly, I agree wholeheartedly that the slogan which will go down in history as the most crass is the Prime Minister's repeated boast that his Government had brought an end to the era of boom and bust. In fact, the Government were pursuing policies, in a temporary, very benign international climate, that would bring about an almighty bust. What is more—here I agree with my noble friend Lord Lawson—the very repetition of the point led many individuals in businesses to feel that they were safe to borrow more heavily than ever before. Imprudent lending, as he said, drove out prudent lending and imprudent borrowing drove out prudent borrowing.
	Thirdly, I refer to the comments of my noble friend Lord Griffiths on the measures taken by the Government to deal with bank liquidity, which I too support. They are to help not only small businesses. I support what the noble Lord, Lord Bilimoria, said. I was actually the Minister who originally introduced the loan guarantee scheme, so naturally I support what he said. However, big businesses often find it very difficult to raise short-term finance in the current situation. It has been drawn to my attention that the Federal Reserve board has recently introduced a commercial-paper funding facility to assist commercial paper in the United States. Does the Minister feel that that would be a useful addition here too?
	I turn next to the regulatory regime, on which there has been less comment in this debate. I realise that there are many with more expertise on the subject than I have, so I tread warily. I note that there has been much talk that there has recently been better co-operation and co-ordination between the Bank of England and the FSA, which leads me to wonder whether it was strong enough in the years leading up to the crisis when it certainly should have been. I noted that Sir John Gieve, in his address to the BBA's annual supervision conference last week, said:
	"What we have found in the last few years is that the sum of what makes sense at the level of individual institutions does not necessarily add up to what is needed for the system as a whole".
	The report on Northern Rock found the FSA badly lacking in its supervision of what it regarded as one of the most high-risk firms. Was the heavy emphasis in the FSA on box-ticking for the "treating customers fairly" programme at the expense of properly assessing the financial risks of individual firms, which is just as crucial and perhaps even more so for the customers themselves? I wonder whether the FSA got that balance right.
	I have often wondered why Santander seems to be so much less under media and market scrutiny than other banks. In the same lecture, Sir John Gieve referred to the "dynamic provisioning" of Spanish regulations. Are there lessons to be learnt there? I look forward to hearing whether the noble Lord, Lord Burns, has anything to say on that subject, as a director of that bank. Was sufficient attention given to systemic risk? Was the division between the FSA and the Bank of England, after all, a mistake? I look forward to the review of the noble Lord, Lord Turner, on that.
	I want to say a brief word about pensions, following what my noble friend Lord Blyth said. Even if in due course markets recover, the much heavier deficits on most defined benefit schemes as a result of the crisis may well be the last straw for many companies and the last nail in the coffin after that first famous raid in 1997, to which he referred, for even more of those schemes. I am also concerned about the implications for personal pensions—I wish I could speak longer on that. The present crisis, combined with a very low savings ratio and high pressures on personal discretionary expenditure, means that the outlook for personal pensions is pretty depressing.
	I was one of those who earlier strongly supported the PFI regime and I introduced one or two PFIs myself. However, I have been concerned for some time about the scale of the situation now. It is rather like off-balance-sheet financing: if it is not on too large a scale, it is very sensible. The scale of PFIs now is so large that I believe it is stoking up trouble for the future and affecting the public spending programmes because so much of the capital spending, about which the Government boast in education, health and so on, was done through PFI schemes so is not included in the borrowing-to-invest figures. I fear that the PFI schemes will make the future public spending problems even greater. It is future Governments and future generations who will pay for it.
	That leads me to my final point: what happens next? Lower interest rates are fine. Will banks, in an attempt to increase margins, follow completely the downward movement in interest rates? Will that create further risks for sterling? Above all, will that last if the Government add to an already very high level of borrowing by attempting to spend their way out of a crisis, as they are apparently planning to do? Here I strongly support the view of all those who warn of the dangers of this. For this Government, spending our way out of the crisis now is dictated more by the political calendar than by economic needs, and the next Government will be left to face the bill.
	I am delighted that we have had this debate today, but it is in advance of the public spending review, which will greatly add to the figures and I hope to the government policies rather more than the Mais lecture which the Chancellor delivered last week. I very much hope that we will be able to return to this subject with a full-length debate on the Queen's Speech, because that would be highly appropriate in the light of the public spending report.

Lord Skidelsky: My Lords, I would like to follow the structure of the speech of the noble Lord, Lord Lawson, although my arguments and conclusions will be a little different from his: how we got to where we are and what should be done about it. On how we got to where we are, as I understand it, the noble Lord, Lord Lawson, chiefly blames the failure of banking supervision, which enabled the banks to lend recklessly. Of course, that is a large part of the issue. The whole world became vastly over-leveraged. Ten years ago the world stock of financial assets, stocks, bonds, loans and mortgages was equal to the total of world GDP. When the crisis hit last year it was four times as much and financial derivatives, which are claims on financial assets, were 10 times larger than that. It was like an inverted pyramid: the more claims were piled up on top of real output, the more wobbly the pyramid became and eventually it collapsed.
	Lack of banking supervision is important, but another crucial part, which was not mentioned, was played by financial innovation. Very clever entrepreneurs—mathematical whizz-kids equipped with computers—invented instruments of increasing sophistication and obscurity, which enabled debt to expand exponentially. I doubt if the banks themselves understood what was going on, and regulators and supervisors would have understood even less.
	The second cause of the boom-and-bust phenomenon was the global imbalances that had been building up in recent years, starting with the collapse of the first Bretton Woods system. The key point has been the accumulation of massive reserves by east Asian countries. The counterpart of the consumption glut in the West was the savings glut in the Far East. Exchange rate undervaluation by Asian countries was the policy weapon used to carry out the accumulation of reserves and export-led growth. These excess Asian savings have been shovelled into the housing bubbles of America and Britain not directly, but by enabling our Governments to pursue expansionary monetary and fiscal policies that fuelled an unsustainable credit and housing boom. For the past 10 years the United States has, in effect, had no budget constraint, and what was true of the country as a whole was true of companies and individuals who piled up debt on the back of constantly inflating house and asset prices. Therefore, lack of bank supervision is not the sole explanation of things that have gone wrong.
	What should we now do? Beyond the rescue operations the Government have already carried out, it is not completely obvious to me. Everyone agrees that the bank rate should come down, but how many people realise that lowering the bank rate is not the same as lowering interest rates? If the banks, on account of their bad debts, are expanding their cash balances at the same time as the Bank of England is lowering its interest rate, or, for that matter, that the Government are buying shares in the banks, there will not necessarily be a drop in the price at which banks are prepared to part with their money. That may occur even if the bank rate drops to zero. That is not just a theoretical possibility—in the theory, it is called the liquidity trap—as the Japanese experience in the 1990s gave it some empirical support. If we go back for a moment to the 1930s, the policy of cheap money, which started in 1932, only started to work once recovery had already started. In other words, the horse was willing to drink by that time. That recovery was started by Britain leaving the gold standard in 1931. Today's equivalent is the depreciation of the pound, which is one of the more hopeful aspects of the current situation. Therefore, I do not agree with the noble Lord, Lord Taverne. Depreciation has always been a shock absorber. It is very necessary and is coming into operation now. Thank God, we are not in the euro. For that, I am willing to give considerable credit to the Prime Minister, who held out against it.
	I wish I could give him similar credit for fiscal policy, but I cannot. This has been a disaster area. He gave the Treasury a golden rule, which was to balance its current expenditure by taxes over the business cycle, so why, after six years of boom, are we entering this present crisis with a projected deficit of £60 billion, which the automatic stabilisers will bring to £100 billion? It is not the deficit as a percentage of GDP that is the issue, but the confidence factor. With this kind of fiscal background, people will lack confidence in government finances.
	As to the global imbalances, we need to reduce the incentives for countries to accumulate such huge reserves. One suggestion that I am quite attracted to is the idea of some pooling of those reserves in an international body like the IMF so that they might be redistributed to countries in deficit.
	My final point is more abstract. It is about economic theory. The heart of the issue is whether what we are experiencing is a once or twice in a century chance or an ever present possibility. If this kind of financial tsunami is a once in a century chance, we do not need to base our lives on the possibility that it is going to happen. We can have a theory that assumes that such tsunamis are outliers outside any normal distribution, and that is fine. However, if they are an ever present possibility, we need to guard against them. If we regard them as simply outliers, we keep Keynes in his cupboard, bring him out occasionally to be dusted down and, once he has done his rescue work, we put him back in again and everything goes on as before. However, Keynes believed that an unregulated and unmanaged market was always prone to such huge swings because the future is uncertain—the point made by the noble Lord, Lord Peston—and although we can insure against risk, there is no insurance against uncertainty, so these phenomena, with their accompanying swings of opinion, herd behaviour and so on are built into the operation of a market.
	How seriously do we treat this volatility? Do we say that it is a price that we should pay for the greater efficiency of a deregulated market or is it a price too high? I shall end with a quotation from Keynes, who is endlessly quotable and whose quotations shed great illumination. He described economics as,
	"one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future".
	We try to disguise this ignorance by assuming that the future will be like the past, that existing opinion correctly sums up current prospects and by copying what everyone else is doing. However, any view of the future,
	"based on so flimsy a foundation ... is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct ... the market will be subject to waves of optimistic and pessimistic sentiment".
	I do not think anyone has bettered that as a description of where we are now.

Baroness O'Cathain: My Lords, I welcome this debate and hope that following the Minister's opening speech with its long catalogue of information on how wonderful the Government have been, all of which has been in the public domain for some time, in her closing speech the noble Baroness, Lady Vadera, will be able to indicate the current thinking of the Government in this serious situation and give us and a worried country some crumbs of comfort. I worry about the current economic situation and how it will impact on the future performance of the economy, not least on our competitive position in the global market but, most of all, I am concerned about the huge uncertainty, grave concerns and serious feeling of insecurity among the population of this country as a whole.
	The headlines in the press and the pundits on the air—I cannot comment on TV, but I am sure the broadcasts there are no less scary than the others—are having a dreadful effect on those who were once famously described by a Cabinet Minister in a new Labour Government as "the ordinary people". We need a rational analysis described in understandable terms. We want honesty from the Minister and an indication of the Government's future policy. We are too frequently fed a diet that reiterates the measures already announced. Openness and honesty are necessary to calm the country as a whole, families that are so worried about their housing situation, employees worried about their jobs and small businesses, which employ some 13 million. People are being badly wounded by the behaviour of the banks and by the effects of the policies so succinctly stated by the noble Lord, Lord Bilimoria.
	Most of us agree that the first few years of this Government were successful. The economic and spending policies of our Government were followed. The independence of the Bank of England, despite initial worries expressed by this side of the House, was a very good policy. However, despite many objections by the MPC committee of this House, voiced strongly by the noble Lords, Lord Peston and Lord Barnett, and by the rest of our committee, in committee and on the Floor of this House, the Government stuck single-mindedly to their determination to have just one objective for the MPC: namely, keeping inflation below 2.5 per cent.
	Of course, we all have PhDs in hindsight, but that determination not to listen was one fact that, long term, has had a very deleterious impact on our economy. Another fact, again debated in the MPC committee so ably chaired by the noble Lord, Lord Peston, was the determination of the head of the newly set-up FSA to combine the roles of chairman and chief executive. That flew in the face of all the tenets of corporate governance that had recently been accepted by business but ignored by government. That is no longer the case, but starting off such an important regulatory organisation with defiance in the face of rules imposed on others must have had an effect on the whole organisation. It almost certainly felt that it was bomb-proof.
	There has also been the lacklustre performance of the FSA, notably over Northern Rock, which has already been mentioned several times, but also in attention to issues that seem of a second order compared with the mess that the regulatory authorities have got us into now. I wonder how many of your Lordships have had the most irritating demands from the FSA requiring passports, utility bills and so on when making small investments. Surely close attention to the activities of banks and hedge funds would have been much more appropriate.
	There is another fact. After a few good years, complacency and arrogance have taken over and now hubris has been followed by nemesis. The eye was definitely taken off the ball. Above all, the idea of saving did not feature, despite the constant reference to prudence. Many people were fooled into believing that, in having a huge mortgage, they were in fact saving. Memories are very short. The negative equity situation of relatively recent past years was never discussed. After all, we would no longer have boom and bust.
	On several occasions, I have spoken of my anxiety concerning the erosion of the savings ratio, most recently in a debate led by the most reverend Primate the Archbishop of Canterbury on 25 April this year, at Hansard col. 1776. I pointed out that in 1997, the savings ratio was 9.5 per cent, but it declined to 5.3 per cent in 2005. The most recent figure—I have to correct two previous speakers—is now minus 1 per cent. My noble friends Lady Noakes and Lord Lawson have also mentioned that.
	We are where we are, but what is likely to happen in future? Last week, I received a pre-publication document written by my close friend Howard Flight, the former MP. It will be published tomorrow, but I have his permission to quote from it. It states:
	"The UK outlook is for vicious house price deflation; a severe recession, a falling stock market and a large sterling devaluation".
	He further draws attention to the fact that it was,
	"extraordinary that government, regulators and bankers did not recognise the impending crisis".
	I say amen to that. Reading his document, I am convinced that the three major priorities must be, first, to restore liquidity to the inter-bank market; secondly, to sustain the capital base of the banking system; and, thirdly, to stop banks being obliged to reduce their lending.
	Does the noble Baroness recognise that the measures taken by the Government in the bail-out exercise are more draconian in how they treat preference shares than the Dutch Government's action to assist ING? Preference shares in the UK case have a charge of 12 per cent; in the case of IMG, it is 8.5 per cent. Why is that?
	Secondly, is the noble Baroness prepared to attempt to address the major concerns of pensioners, who think, with reason, that their pensions will be badly affected by the current situation, on top of the heinous crime of the then Chancellor in looting the pension funds in 1997—amounting now, as my noble friend Lord Blyth said, to a total damage to the pensions of this country of £200 billion?
	We must give a clear steer to the world that we are determined to ride this one out, to protect our citizens from the worst effects of utter dereliction of moral duty by the financial sector and the regulators. Perhaps the Government should also remember that not all the best brains work for new Labour, and that now is the time to get on with listening to wise people, repairing the damage and putting in place firm, transparent and fair policies for the economy.

Lord Burns: My Lords, I thank the noble Lord, Lord Myners, for introducing the debate and join other noble Lords in welcoming him to the House. We are former board colleagues at a well-known retailer, and I warmly welcome him to his position as Minister for the City. I am sure that he will enjoy the Treasury a great deal and I wish him well in that role.
	Given the nature of the debate, I should remind the House that, as set out in the Register of Members' Interests, I am a non-executive director of Banco Santander and chairman of its two UK banking subsidiaries, Abbey National and, now, Alliance and Leicester.
	My first comments are about the current economic cycle. I understand the temptation to make the case that this is not just a normal boom and bust for which the Government are responsible, but a boom and bust made elsewhere for which the authorities cannot be blamed. There is something in that assertion, but surely the Government overstate their case. The key feature of any bust is the boom that precedes it, and the run-up to this bust has many of the characteristics of other booms. We have seen over-optimism about the underlying growth of output; we have watched a house price and equity boom go without any response in interest rates; we have had a commodity and oil price boom that was put down to long-term resource problems rather than the cycle; a boom in financial activity and rising levels of leverage; and, of course, the boom in consumer lending. In this case, more of the unsustainable increase in world output came from activities outside the advanced industrial countries than was the case in many other cycles, but we have clearly played our part and should not exaggerate the position.
	To me, the difference in this cycle is less about how the boom happened and more about the way that it came to an end. Here, there is of course a big difference. Normally, an upswing comes to an end with rising inflation and interest rates whereas, on this occasion, the boom was brought to an end by the emergence of bad debt, an abrupt freezing of the inter-bank market and huge losses on asset-backed securities that far exceed the impairment of the underlying assets. These losses have inflicted severe damage on the capital resources of many of the banks, noticeably the British banks. Not surprisingly, the banks are now cutting back lending and trying to avoid being too dependent on wholesale financial markets. Instead of interest rates rising to choke off the pressure, declining availability has done the job for us.
	Along with others, I still have a lot of uncertainty as to the severity and length of the recession. The outcome still depends a lot on what happens in the financial part of the crisis. The noble Lord, Lord Griffiths, is surely right to say that we are not facing a 1930s-style meltdown, but everything that I have seen from the perspective of the banking industry tells me that we face a very painful period. How the UK economy performs relative to other advanced industrial countries is also uncertain. Along with many other noble Lords, I would hesitate to argue that we are better positioned than they are.
	We still face a painful time. Resolving the crisis will take time. In my view, it is right that the Government's attention should be focused on doing what they can to maintain levels of lending within the economy. Along with others, I welcome many of the actions that they have taken. As the noble Lord, Lord Lawson, pointed out, there are lessons for the future for regulation and supervision but, to my mind, that is for the future. As a regulated person, I hesitate to criticise my regulators at this moment.
	The noble Lord, Lord MacGregor, asked me about Spanish regulation. I am sure that we will hear a lot more about the future of supervision in later debates. In response to his question, I shall make a couple of points. First, the Bank of Spain has done what we have all been told not to do throughout our lives; that is, fight the last war. Its actions were the response to the banking collapses in Spain in the early 1980s from which it learnt a lot. We live under three aspects of the regime in Spain. It has had a regime of insisting that banks hold capital against off-balance sheet vehicles, which meant that none of the Spanish banks had any off-balance sheet vehicles. Therefore, they had no toxic assets and largely escaped from this first round of problems. Secondly, banks were required to hold general provisions against all loans and not only against specific bad debts when they occur. Thirdly—I hesitate to say this—it is a long way from light-touch regulation. The Bank of Spain has 27 permanently resident people going through the books in Banco Santander, which is a rather different regime from ours—thank God.
	The result of our financial crisis is that the banks are now in a difficult position. Given their capital position and the present dangers of relying on wholesale lending, they are all being forced to deleverage their balance sheets, which means a combination of lower lending and raising more capital. That is why it is right for the Government to underwrite injections of capital, which is to be welcomed.
	The banks need access to liquidity. Again, it is important for the authorities to continue to play the part that they have in underwriting wholesale borrowing by the banks, and being an intermediary and recycling cash between banks. It is to the credit of the Government that they have taken action on each of those fronts, as well as working to find solutions for banks that have been in serious difficulty. Only time will tell whether that is enough. The Government have to stand by ready to do more if they are to help to unwind the blockages that I fear still remain in the financial system for inter-bank lending and wholesale lending generally.
	As other noble Lords have argued, these actions need to be buttressed by an aggressive cut in interest rates. Monetary policy has to be the main lever to support the economy. Effective market interest rates have risen sharply relative to bank rate and it is my judgment, along with many others, that the bank rate needs to adjust to compensate. As my noble friend Lord Skidelsky reminds us, we cannot be sure that market rates will decline in line with the official intervention rate, but, in time, it will make a significant difference. We will also get some easing from the decline in sterling.
	I have some particular concerns about fiscal policy. If I read the newspapers correctly, we seem to be being briefed that the budget deficit could be as bad as in the early 1990s. I no longer make forecasts, but I would simply observe that at this stage in the cycle the tendency of all forecasts is towards over-optimism. It is generally accepted outside Whitehall that the fiscal rules, although worthy in their intention, have not in practice been a success. The extent to which they seem to be more influenced by the re-writing of the past than a judgment about the present or the future has been a problem, particularly taking the view that the cycle has been as long as it has.
	With the prospect of a period of falling output and a relatively slow recovery, the budget deficit will grow rapidly. To the extent that it is because of the cycle and what we know as the automatic stabilisers coming into effect, that is not a matter of great concern, as many have argued. As output returns, some of that deficit will decline automatically. I belong to the same group as many noble Lords who have spoken today who say that to go beyond that would be very dangerous at this point. We begin from a position of a structural budget deficit. Adding to that structural budget deficit can only increase the problems subsequently.
	Each of the three serious downturns that I have observed at close quarters—1974-75, 1980-81 and 1991-92—have had two striking characteristics; namely, the emergence of a budget deficit that increased to a point where the restoration of structural balance was a long and painful process, and at some point a depreciation of sterling that moved from just about being welcome to becoming very painful. Let us hope that we are not forced to repeat those experiences.

Lord Saatchi: My Lords, many noble Lords want to know what went wrong. Perhaps your Lordships would allow me to take them to the committee room in the US Congress a few days ago where the former chairman of the Federal Reserve was giving prepared testimony. He was asked how this economic debacle had started on his watch. His answer was that he had been following orders. As he put it:
	"I'm here to uphold the laws of the land passed by Congress, not my own predilections".
	In other words, the fault lay with the legislation which gave him his instructions.
	The same might be said of the Bank of England Act 1998—the iconic Act of Parliament which gave the Bank of England its independence—which is why I was grateful to the usual channels of your Lordships' House for allowing me to introduce last week the Bank of England (Amendment) Bill. The Bank of England Act 1998 has a fatal flaw: it has three words too many, which this Bill aims to delete. Section 11 in Part II of the Act mis-defined the role of the bank in relation to monetary policy. It states:
	"In relation to monetary policy, the objectives of the Bank of England shall be—
	a) to maintain price stability, andb) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment".
	During the Committee stage of the Bill in your Lordships' House—I am most indebted to the noble Lord, Lord Barnett, for first drawing my attention to these debates many years ago—there was much discussion about the three words, "subject to that". Why could it not say, "having regard to" or "taking account of"? Why were all other considerations to be subordinate to controlling inflation?
	As distinguished LSE alumni in the Chamber are aware, the economic orthodoxy which underpinned the Act was based on the seminal work of Professor Paish at LSE. The "Paish Curve" showed that high inflation was incompatible with high employment and high growth. The mechanism of the causal relationship between them was "wage push". Noting the expectation of higher prices, unions would press—

Lord Peston: My Lords, does the noble Lord mean Frank Paish or does he mean Bill Phillips?

Lord Saatchi: My Lords, I am not sure. Noting the expectation of higher prices, unions would press for higher wages and employers would lay off workers to compensate. That was the dreaded wage/price spiral of the 1970s. Policy makers concluded, and legislators concurred, that inflation must be curbed at all costs. At the time of the Bank of England Act, the winning argument was that the relegation of the Government's "growth and employment objectives" would prevent the manipulation of economic activity by unscrupulous politicians in search of votes. In any case, the control of inflation was said to be the best guarantor of growth and employment.
	In October 2008, that fine theory met its Waterloo when we discovered that you could have, according to the deputy governor of the Bank of England,
	"the largest financial crisis in human history",
	during a period of low inflation. By focusing only on inflation, as Section 11 directed them to do, Bank of England officials were blindfolded to the disaster that could occur in a low-inflation environment. That error was compounded by obliging the Bank to monitor the wrong kind of inflation. Whereas the Bank's consumer price index—the CPI—keeps a close eye on the price of a packet of peas and a loaf of bread, it overlooks the very aspects of inflation which led to the current crisis.
	For the past five years, "debt inflation" was 9.5 per cent a year, which is almost five times the Bank of England's CPI inflation target. But where is debt inflation in the CPI? It is not included. During the same period, the inflation rate of one asset class—residential property—was 13 per cent per annum. Where is that in the CPI? It is not included. What about the cost of acquiring and holding these property assets; that is, mortgage interest? It is not included.
	The Bank's measure of inflation was irrelevant and out of touch because the world had changed. The era of hand signals from Threadneedle Street to discourage troublesome unions was over. Millions of people had become investors in a new asset class: they were home owners. They adopted a simple model. I borrow money and I buy an asset. The price goes up, I exit the asset, I repay the loan and I keep the profit. This was the joy of debt as taught by the masters of private equity, and why should not private individuals do the same? So they did, in their millions. By creating the false impression that low inflation meant economic stability, the Bank of England Act 1998 encouraged the view that it was safe to borrow and safe to invest. As many noble Lords have said, UK average household debt has more than doubled in 10 years, and British households have taken on more than twice as much debt as their EU counterparts. Yet the rate of inflation as monitored by the Bank of England in accordance with the Act excluded debt inflation, asset class inflation and mortgage interest inflation, the very causes of the current crisis.
	Nor did the Act consider how a change in the inflation rate of a certain asset class could bring about a dramatic collapse in the economy, notwithstanding low inflation. As the current chairman of the Federal Reserve, Ben Bernanke, put it, there is no one correct method for valuing an asset class. There are two methods. The first is the price a normal seller would receive from a normal buyer who looks to the value of the asset at maturity. The second is the price a distressed seller would accept from a reluctant buyer who thinks only of short-term risk. That change in valuation method, completely unforeseen in Section 11 of the Bank of England Act, created this crisis.
	Experts tell us that the UK will have the worst of this crash because, in conformity with its exclusive brief to control inflation, the Bank of England kept UK interest rates at 5 per cent, the highest level among the G7 countries, until this October, while the US, for example, cut interest rates by more than half from 5.25 per cent to 2 per cent in April. The record seems to show that the top officials at the Bank were like top generals given the wrong orders. All noble Lords know the importance of language. We are often mocked for endlessly debating minute amendments to legislation such as "delete 'a' and insert 'the'". In the case of the Bank of England Act 1998, three words really have changed history. It is time to delete them from the statute book.

Lord Barnett: My Lords, I thank the noble Lord, Lord Saatchi, for his reference to what I have said on a number of occasions about those three little words, "subject to that". In return I will support his Bill if it ever has the slightest chance of getting on the statute book.
	I broadly support the Government's proposed action. Indeed, I wish to speak briefly on the question of action rather than on the history, short or long, of the past. I believe that the Government are broadly right. What they are doing gives us at least a chance—I put it no higher than that—that the recession that we are about to go into will be shallower and shorter than might otherwise be the case. However, I fear that the alternatives of the Opposition offer nothing at all; they are virtually gloating about the depth of the recession. The noble Baroness, Lady Noakes, ended her speech by telling us that they have a plan, but understandably she did not tell us about that plan.
	I turn first to the Government's proposals. While this is not a proposal, the Government have implied that there should be cuts in interest rates. I strongly support that. One reason why I was unhappy about the three little words was that I feared what the Governor of the Bank of England would or would not do. I fear now that the current governor and the MPC may well not cut interest rates as much as they should. If we are in the kind of crisis that we all agree we face, I am not happy to leave it solely to the MPC, and particularly this governor, to decide what interest rates should be. The Bank of England Act allows the Government to overrule the MPC and decide the interest rate. In the current crisis, I would strongly support and commend such action. However, I accept what the noble Lord, Lord Skidelsky, said: cutting the base rate is not necessarily the same as cutting interest rates, especially as they are in the hands of the same banks whose recent behaviour has done so much damage to our economy.
	I come to the second of my conditions in supporting the Government. Increased liquidity for the banks was absolutely right, but my worry, as with interest rates, lies in the fact that I cannot trust the bankers to decide how the liquidity should or should not be used. The noble Lord, Lord Bilimoria, and others have spoken about helping small businesses and householders. There are all kinds of ways in which the liquidity that we have provided to the banks can or cannot be used. My right honourable friend the Chancellor has rightly said that he does not propose that he or any other Minister should run the banks.
	My worry is focused on the bankers who are running the banks, because they have not shown themselves to be very successful in doing so. The plain fact is that at the moment they are not lending to small businesses. Having greedily used all kinds of methods to increase short-term profitability in order to get high bonuses, they are now not willing to lend to the people to whom they should have been lending in the first place. Small businesses desperately need this finance, but they are not getting it. I worry that this increased liquidity will not result in lending to small and medium-sized businesses that could use the money to the advantage of the economy, bringing it out of the recession more quickly. I am concerned about how the banks will behave.
	Many speakers have argued quite rightly for greater supervision by the FSA than we have seen so far. We know about the enormous errors on the part of the FSA under its previous leadership in the case of Northern Rock and I will not repeat what has been said. We now have a new leader for the FSA, but it is still working under the same rules. That is not good enough. We need the authority to be given instructions or a remit that banks must use the money that we the taxpayers have provided to lend to small and medium-sized businesses. That does not rule out decent bankers deciding that some businesses do not deserve any more money and should go bust. Of course that is the case, in the same way as small borrowers in households will have to be allowed to go bust, although early repossessions should be stopped. We must not take work away from those bankers who know best how small businesses are behaving. My worry is that bankers do not always know best because the old bank manager does not exist. I have an account manager, but I can never get hold of her unless I send an e-mail. I cannot reach her with a telephone call. That service does not exist any more.
	My last main point relates to increased borrowing. Should the Government be borrowing more? I worry that, if they lend now, action will come only much later. Where there is an easy way of lending to someone who can quickly spend the money to the advantage of the economy, that is all right, but not otherwise.
	I have one or two questions for my noble friend who is to wind up the debate. She is not in her place, but I am sure that my noble friend Lord Myners, whom I welcome to his position, will answer. I am worried not about investing in and saving these banks—I agree with that—but about the prices being paid. For example, shares in the Royal Bank of Scotland are to be bought at 65p each. How did the Government work out that value? Was anyone given due diligence on that—not that I would trust anyone to show due diligence on toxic assets? How did they look at those toxic assets? Did they look off balance sheet to know what the value of RBS was? I declare a brief interest in that I bought a few of the rights shares at £2 a share just a few months ago, I am sorry to say, but I do not know whether 65p is the right price now. Perhaps my noble friend will tell us whether proper due diligence was given to that and other banks to find out whether the share was worth even 65p. On that, I leave it to the Government to do all that I have asked them to do. I hope that they will.

Lord Tugendhat: My Lords, the strictures levied at the banks by the noble Lord, Lord Barnett, are, in many cases, well taken. It behoves us all—certainly me and those of us who have earned our living until recently in the banking industry—to approach this debate with a certain amount of humility. But so should the Government. Whatever the faults of the practitioners—and there have been many—it was the Government who constructed the regulatory framework and presided over it and it was the Prime Minister, as he now is, who was for ever telling his European partners how marvellous things were here and who always wanted to be associated with what was going on. If, as the Prime Minister says, there has been an age of irresponsibility, in this country he was the master of the revels and the noble Baroness, who will be returning to the Front Bench soon, was his page.
	Their mentor, the grandmaster of the revels, was Mr Alan Greenspan, the man who opened the new Treasury building. It will not have passed unnoticed in the Treasury that Mr Greenspan has now eaten a certain amount of humble pie; he has looked closely at what has happened and has admitted that perhaps he made errors of judgment in certain respects. It behoves the Government to follow Mr Greenspan on the way down just as they followed him on the way up.
	It is true that other countries are suffering great difficulties, as the Minister pointed out, and that some of them are in a much worse situation than we are. But, although the storm began in the United States and is blowing across the world, certain features of it are particular to this country and are the responsibility of the Government and, in particular, the Prime Minister as the Chancellor of the Exchequer for so many years.
	That said, I give the Prime Minister credit where credit is due and congratulate him on the way in which the recapitalisation of the banks and the attendant measures were put into effect. The British Government have set an example that has been followed elsewhere in Europe and in the United States and they deserve praise for that. So, too, does the Conservative leadership for supporting those measures, which is not what opposition leaders always do. It is worth pointing out that this time they did and that they deserve credit for it.
	So where do we go next? Clearly the whole system of financial regulation and oversight must be looked at again from the bottom up—not only with regard to banks but with regard to insurance companies, hedge funds and the role of shareholders, who were for ever pushing management forward into taking greater and greater risks. The Minister and the House will recall that Lloyds was attacked by its shareholders for not doing the kind of thing that HBOS was doing, and we can see where that has ended up. All these players need to be looked at in the context of an overall review, as does the role of auditors.
	In the time available, I shall make only one point at this stage. The primary responsibility for banking regulation should rest with the FSA rather than with the Bank of England. I agree with my noble friend Lord Lawson that regulating banks is not the same as regulating other institutions and requires particular skills—one might almost say particular arts—but I would place the primary responsibility with the FSA rather than with the Bank of England. Banking regulation is a thankless and controversial task, involving much public hassle and reputational risk. The Bank of England found that as it grappled with the secondary banking crisis in the 1970s and later with BCCI and Barings, to name only two.
	Today, unlike in those days, the Bank of England's primary responsibility is monetary policy. Its ability to command public support and respect in that role could be seriously compromised if it was also held responsible for problems that arise in the banking sector and the way in which they are handled. Again, one needs only to look back at what happened with BCCI and Barings to understand the point that I am making.
	This brings me to the question of monetary policy. Here I am very much with the majority. I agree with my noble friend Lord Griffiths that the Bank of England should cut interest rates when it next meets. I should like them cut quite sharply. I agree with Martin Wolf in the Financial Times that it cannot make sense for US rates to be 1 per cent while the United Kingdom's are 4.5 per cent. Last year, the Bank of England was slow in injecting liquidity into the system compared with the Fed in the United States and the European Central Bank. This year, it has been slow in cutting interest rates. I hope that, when the events of the past few months, or even the past couple of years, are looked at and when conclusions are drawn about the role of different institutions—of the Government, of the banks and of the FSA—the role of the Bank of England will also be looked at. So far the Bank of England has escaped a little easily during the debates over what has happened. I look to it now to cut interest rates. At this stage, the principal effort in combating the recession should be on that front.
	No general throws all his weapons and all his troops into the beginning of a battle and we should see how we get on with monetary policy. I hope that we can avoid drastic fiscal measures and too much in the way of public spending, tax cuts and so on. However, in the circumstances in which we find ourselves, while we should rely on monetary policy now, the Government would be wise to make preparations for other measures should they be needed.

Lord Lea of Crondall: My Lords, I look forward to hearing more in future from my noble friend Lord Myners, whom I welcome to the Front Bench. I also look forward to reading his memoirs in due course to discover how this job compares with the others he has had.
	I am quite sure that the instinct of the British public at the present time is that the Government have shown courage and good judgment on the handling of the crisis and the recapitalisation of the banks. I regret that the support from the Conservative Party seems now to have been withdrawn, but I suppose it was only a matter of time. A comparison has been made several times today with the crisis of 1929-31 but, in practice, I never detected any Labour anxieties that this time round we could be in for a rerun of the Ramsay MacDonald episode. I do not recall bank nationalisation featuring in the programme of the National Government.
	This may or may not be the time for a public inquiry into the banks' suicidal leverage policies, but that time will come. In the past few months, we have seen in the financial sector the nemesis of the casino, to use Keynes's metaphor, whose players have leveraged their way to the biggest fiasco since 1929-31. One could spend all one's speech pointing the finger at those responsible. The fact that Wall Street has done something similar in no way absolves the City of London. As the chief executive of, I think, Citibank admitted, they were all dancing faster and faster until the music stopped.
	The banks seem to have had a herd instinct. Paradoxically, that seems to be a consequence of the oligopolistic competition between them so that they have all gone over the cliff together, like the Gadarene swine. It is no defence to say that they were trying to take on sub-prime commitments to help the lower paid in the mortgage market; mutual building societies did that for years and did not get into trouble. It is the doubling and trebling of the leverage ratios that did the damage, and I have to echo other speakers by saying that the Bank of England and the FSA appeared to stand idly by. The Americans have just discovered that rates as low as 1 per cent are not doing the trick on the recovery, so the manifesto of the right-leaning gang of 16 economists in last week's Sunday Telegraph is not proven, even by the Federal Reserve.
	The present conjunction of circumstances is precisely what Keynes had a lot to say about in the General Theory—namely, the ineffectiveness of monetary policy when banking failures are triggered by falling asset prices. His solutions, including greater public spending funded by borrowing, have been criticised on the ground that they increase long-term public debt. They were not calibrated, as I think the noble Baroness, Lady Shephard of Northwold, stated, on crude surpluses. That is not really the problem, though, if one looks at the reverse scenario; namely, economic collapse. In a mixed economy welfare state society, debt in Keynesian recovery will first go up and then go down again when, after the downturn, we get back to an economy working at high levels of employment, producing the spending power and the tax revenues that will enable productivity to go forward. The key is aggregate demand. That is one reason why demand management is good also for people in developing countries, and we provide them with the market. Here we are faced with the most obvious demonstration of the fallacy associated, rightly or wrongly, with the noble Baroness, Lady Thatcher, and dutifully followed today by the noble Lord, Lord Forsyth of Drumlean, that the finances of the economy in aggregate can be regarded like the finances of an individual household.
	What are the people of Burton-on-Trent supposed to make of all this? They are bewildered and short of confidence in the motives and actions of the financial services industry. They see a grotesque inequity in the rewards for top executives in the sector and the average man and woman in the street. When you boil it down, it was the average household that was paying for those £20 billion bonuses last year and the year before. To add insult to injury, the figures jack up the average earnings index due to the way that the ONS does that arithmetic, sending out perverse signals about inflation. I have not yet heard anyone say that this crisis is all the fault of the workers, but I am reminded of the old dictum; "It's the poor what gets the blame".
	Another dictum, which has obviously occurred to the noble Lord, Lord Smith of Clifton, who unfortunately is not in his place, is that in "The Mikado"; "Let the punishment fit the crime". I do not know who the noble Lord had in mind for the role of Lord High Executioner—maybe Arthur Scargill, but I think Arthur Scargill would have been far too squeamish. The serious point is this: we have not heard too many apologies from the City of London, have we? Frankly, some apologies are long overdue. Instead, though, we have had the not atypical speeches from the Conservative Benches saying that, whoever's fault it was, it was certainly not the fault of their friends in the City. There have been some exceptions to that, but that is the tone coming across from the other side.
	One the macroeconomic side, with the debate raging about the merits of what John Maynard Keynes may have said, having read my economics at Cambridge all those years ago and being in the presence of distinguished economists inter alia on these Benches such as my noble friends Lord Peston and Lord Eatwell, I presume to point out that Keynes did not say a lot of the things he is caricatured as having said. What is true, though, and what is central to the Keynesian revolution, is that when there is a lack of confidence and the prospect of a deep recession, simply relying on cutting interest rates is like pushing on a piece of string.
	I strongly welcome the fact that the UK, and Gordon Brown in particular, is helping to give strong direction to the European Union. The EU should play a central role in drawing up global rules, and it is welcome that the Labour Government are giving a lead in Europe and in the world to bring some better co-ordination and order to financial markets. I agree with the implication of the noble Lord, Lord Taverne, that the City of London could remain as a financial centre of Europe as part of the euro-zone. We cannot in this country for ever go on having our cake and eating it.
	My final point is about new banking assistance to small firms and so on. Some years ago, I had a hand in writing a TUC Labour Party policy statement setting out the case for a national investment bank. Of course this was howled down with derision in the City pages of the newspapers. I welcome the new initiatives by the European Investment Bank. A national investment bank, however titled—the noble Lord, Lord Bilimoria appears to recognise that a new publicly accounted facility is needed—could work in conjunction with it. I note that the TUC and the CBI in Wales are in fact now working towards that idea.
	We have to avoid the recession tearing up the social contract, if I may use that term in the broadest sense. You cannot negotiate a redundancy agreement with a hedge fund. The new capitalism is not one happy family if one does not know even who one's parents are. Let us get back to basics on that as well.

Lord Higgins: My Lords, one can begin only by saying, "Better late than never". It is absurd that, after months of economic crisis, this House only now has the opportunity to debate it. Moreover, I am not at all clear why this is not a two-day debate rather than a one-day debate; some noble Lords have been deterred from taking part when the list is so long. We have had a number of repeated Statements in the House but, as we all know, they are not the same thing as a full debate. The quality of the debate so far makes it clear what the Government have been missing. They are in need of advice of the kind that the expertise and experience of this House can provide.
	I congratulate the noble Lord, Lord Myners, on his ennoblement and on taking up his new office. I add a word of appreciation for the noble Lord, Lord Davies of Oldham, who has battled valiantly during recent months when debating these issues in Statements and so on. However, it is quite apparent that he has had remarkably little backup from the Box. In fact, the backing he has had generally from the Treasury is not the appropriate level of briefing that this House is entitled to receive. I regret to say that this looks as though it will continue, and I therefore make that point to the new Minister. For example, in the debates that we had in Committee—which unfortunately I could not take part in because I was at the UN in New York—although the Prime Minister was rushing around the world saying, "New Bretton Woods! New Bretton Woods!", it is clear from the Minister's reply that they have no very clear idea of what that means.
	That is also true of the speech that the Minister delivered today. In his intervention during that speech, the noble Lord, Lord Davies, suggested that we were intervening because we had been Members of the House of Commons. That might have been understandable because the Minister in fact made a House of Commons speech; indeed, it may be a speech that they have not made in the Commons. Be that as it may, I intervened because I was shocked by the reply he gave my noble friend. The idea that we should have an investigation by the FSA after Equitable Life and Northern Rock I can describe only as "quaint".
	I want to bring to the attention of the House one particular problem which, believe it or not, no one else has referred to this afternoon. It is clear that the Government are vastly increasing debt. I make no immediate complaint about that because they are pursuing a policy of recapitalising the banks. I am very glad that the Prime Minister has suggested taking equity interest in banks rather than simply buying dud bank assets. We are certainly doing it the right way round and I am glad that the Government have taken that decision, which Mr Paulson seemed to be remarkably slow in understanding.
	In any event, there is an increase in debt and the crucial question, which no one has even mentioned, is what we are going to do about it. As everyone knows, there are only really three possibilities. You could try to cover it by increased taxation but it is inconceivable, especially ahead of an election, that any Government would increase taxation, at any rate in the foreseeable future, to cover the debts which we are incurring, together with the guarantees. I hope that both of these will now appear on the balance sheet and not be hidden, as they have been on many occasions in the past. The second option is to cut public expenditure. Again, I do not think that that is conceivable on the scale that is necessary. So it all comes down to borrowing. As I was either at the Treasury or chairman of the Treasury Committee throughout the previous financial crises, I am bound to say that how we fund the borrowing is crucial. If it is funded by issuing stock and gilts to the banks, that will probably have the usual well known multiplier effect, perhaps modified a little by the fact that they will recapitalise themselves to some extent as well. None the less, if that is the way the borrowing is funded, there will be an increase, probably a huge one, in that unfashionable concept of the money supply. The money supply is not the same as interest rate policy—there has been confusion during the course of the afternoon between interest rate policy and money supply policy. The effect will be to exert enormous inflationary pressures.
	The problem is that if you want to borrow from the public, you can do so only at higher interest rates. At a time when one would like to see lower interest rates, there will be pressure to put them up. That is the crucial point made by the noble Lord, Lord Skidelsky—the bank rate is not the same as interest rates. Throughout today's debate there has been confusion, if I may presume to say so, between the bank rate and interest rates. The pressures which the Government have now created will raise the money supply and inflationary pressures.
	As always in economics, timing will be crucial. There is, I think, a very real danger of going from an impending recession to extremely high inflation at a time when the rate of inflation is already way above the Government's target and when those inflationary pressures are being accentuated by the fall in the exchange rate. We could go straight from one situation to another with very little gap in between.
	The noble Lord, Lord Peston, rightly drew attention to the short term and the long term. We need to know—and we certainly did not find out today—the Government's policy on dealing with the debt which they are now, quite rightly in my view, incurring. I hope that we shall have better figures and that we can get a reply from the Minister, preferably today, if the Box can scribble away fast enough—I rather doubt whether they have the answer to this one—or perhaps by way of a written reply in the Library or, at any rate, by the time of the Statement to explain the overall situation as the Government see it. The core of the policy is how we fund the debt.

Lord Crickhowell: My Lords, one of the most bizarre features of the financial crisis and this debate has been the presentation of the Prime Minister as a leader in the creation of world financial stability and as the man who saved the banking system by means of an original and uniquely bold initiative. The Minister got rather carried away in his eulogy, apparently without embarrassment, denying that the Prime Minister had any responsibility for the creation of the crisis or even for the 25 per cent devaluation of sterling.
	That the banking system had to be rescued no one doubts, and the Opposition were right to support recapitalisation. The trouble is that the rescue was carried out in a manner likely to do much long-term damage. The mistakes seem very strange when one considers that there were many precedents to guide us and that other leading players were much more skilful in avoiding them.
	My noble friend Lord Forsyth referred to two of the mistakes. However, the most serious was not the much higher rate charge for preference capital than that applied in the United States and in some parts of Europe—Barclays has chosen to pay comparable rates to retain its commercial freedom—but the fact that the Government created so much damage by underwriting the issue of ordinary shares in a way that seemed designed to guarantee that existing shareholders would not, and in many cases could not, participate because of the threat that the banks would not be able to pay dividends for five years. Even if Lloyds finds a way to escape the restriction by repaying preference debt sooner, much of the damage has already been done and the possible routes mentioned by the chairman will not be found cheaply.
	Already the Government's terms have achieved three things: they have increased, probably by several billion pounds, the amount of taxpayers' money that is to be tied up in the participating banks; they have ensured that British banks will be placed in a less competitive position than those that offer more lenient terms overseas; and, not for the first time, they have produced devastating consequences for pension funds and savers, for whom bank dividends were a most significant source of income.
	The latest government-inflicted blow to private sector pensions comes on top of the damage done by Mr Brown's abolition of advance corporation tax relief in his first Budget. I need not add to what my noble friend Lord Blyth had to say about that lamentable story.
	It seems a long time since the Prime Minister enjoyed and took advantage of the benign economic inheritance left him by the outgoing Conservative Government, assisted, for a time, by prudence. Like other noble Lords, I think that he began actually to believe his repeated claim that he had done away with boom and bust. Overcome by hubris, he fed on, encouraged and took part in the reckless surge of borrowing and expenditure that followed, frequently outdoing the financial world in devising off-balance-sheet instruments and manipulating his own golden rules to the point where they were utterly discredited. When the boom ended, the bust was on an almost unprecedented scale; nothing had been put aside in the good years to feed us during the bad.
	We now have the spectacle of the Prime Minister attempting to claim credit for borrowing in order to finance cyclical expenditure programmes, when the reality is that he is forced to borrow on a huge scale because of past excess and because tax revenue is falling and will fall much further just when expenditure to fund benefits is rising. Net government borrowing will almost certainly rise to well over £100 billion next year. That is not debt to fund Keynesian expenditure policies. The situation cannot simply be blamed on the Americans or the banks. The British economy has been stagnant since last April and has been falling more sharply than the economy in the United States, where the Federal Reserve has been more aggressive in cutting interest rates. As my noble friend Lord Saatchi pointed out, our interest rates have been the highest in the G7.
	Some capital infrastructure projects are no doubt worth while but, as others have said, it is doubtful that big new programmes will produce economic benefits in a relevant timescale. Most are likely to reach completion when the economic priority is to,
	"return borrowing and debt to a sustainable level",
	as the Chancellor told us in his Mais lecture. Past precedents provide little encouragement that such a policy would work. As the Times leader put it last Thursday,
	"there is little sense in treating the Government's previous failures of economic management as a model for recovery".
	The time has clearly come to use lower interest rates and currency flexibility. Unlike the noble Lord, Lord Taverne, I say thank goodness that we are not tied to the euro or forced to defend a fixed exchange rate. However, if we are to have special expenditure programmes, could not some of them be directed to re-equipping our chronically underresourced Armed Forces?
	My noble friend Lord Lawson and the noble Lords, Lord Skidelsky and Lord Lea of Crondall, referred to confidence. Confidence is everything. Lack of confidence in the Government's approach has been a major factor in producing the astonishing 25 per cent fall in the value of sterling—a fall that would have destroyed past Governments. It is one thing to be thankful that we do not have to defend an unrealistic exchange rate against the markets; it is quite another to face a devaluation that could reignite inflation.
	It was not a government spending spree that rescued the British economy in the 1930s, or even—I am sorry that the noble Lord, Lord Skidelsky, has left his place—leaving the gold standard. Government policy at that time was austere. The economy recovered and unemployment fell when consumers found the confidence to spend again and fuelled the rapid growth of new industries. Anatole Kaletsky makes a similar point about the US economy in today's Times when he argues that, if the new United States Administration give grounds for fresh confidence, the economy could recover comparatively quickly.
	I borrow from the noble Lord, Lord Skidelsky, Keynes's comment that,
	"fears and hopes ... take charge of human conduct".
	The real disaster would be to fuel the fear rather than hope by continuing the Government's previous policy, devastating to confidence, of reckless and irresponsible spending and borrowing.

Lord Eatwell: My Lords, in the face of the most severe economic circumstances encountered by this country since the 1930s, we need emergency action for the short term and a strategy for medium and long-term recovery. In other words, we need an economic policy road map to ensure that our policies are comprehensive and coherent.
	In my search for that road map, I begin with quotations from two major economic policy speeches. The first is that,
	"our detailed plan for economic reconstruction ... establishes the target of a balanced current budget and falling debt".
	The second is that,
	"it would steady the country greatly if there could be prompt assurance that the budget will be unquestionably balanced even if further taxation is necessary",
	and that,
	"the Government credit will be maintained by refusal to exhaust it by further borrowing".
	One of those quotations is from Mr George Osborne. The other is from Herbert Hoover. Only some slightly archaic language in the words of President Hoover, the architect of the great depression, allows us to identify which is which.
	Mr Osborne did us a great service in his speech last Friday by defining a clear policy demarcation between the Opposition and the Government. It is, as Mr Osborne puts it, a choice between,
	"Keynesian demand management and adoption of Conservative fiscal responsibility".
	What is the substance of the choice between Keynes and what we must now call the Osborne-Hoover approach? First, the Keynesian approach involves a fiscal policy that contributes to the growth of demand. Of course, it is impossible to envisage fiscal policy compensating totally for the collapse of credit that lies at the heart of this crisis. There are well known timing problems in government expenditure, too. However, where already planned infrastructure projects can reasonably be brought forward, they should be. Fiscal measures that benefit the poorest households will also have a positive effect on demand, as the poor spend everything that they receive.
	Secondly, there is monetary policy. Clearly, interest rates should be reduced by as much as is reasonable—a move that has the added advantage of exerting downward pressure on the exchange rate. However, Keynesians know that interest rate policy may not work, especially when there has been a general collapse of confidence. In that case, the Government must take direct measures to stimulate the provision of credit, as this Government have done with their inter-bank lending guarantees.
	A further crucial lesson that Keynes taught us is that a credit crisis is above all a co-ordination failure. The inter-war period demonstrates the danger of international co-ordination failure. My right honourable friend the Prime Minister has played a unique role in leading co-ordinated international action in money and credit markets. To these measures must be added a co-ordinated implementation of expansionary Keynesian policies. Without co-ordinated expansion, one country could be left carrying all the world's deficits, and the expansion worldwide would fail.
	A similar co-ordination failure exists in banking. It would be all too easy for some banks to sit on the sidelines, while others, perhaps those over which the Government have some direct influence, extend credit in a risky environment. It is therefore vital that the Government require all banks to extend the credit necessary to enable industries, large and small, to maintain their activities and extend their investments.
	Thirdly, there must be regulatory co-ordination to prevent the regulatory arbitrage that undermines authority as financial institutions locate their activities in the most lax jurisdictions. My right honourable friend the Prime Minister guided the world in an important step towards regulatory co-ordination when he persuaded the G7 to create the Financial Stability Forum. Now the international community must build on that vital British creation by giving it appropriate powers in an international regulatory environment.
	Co-ordination at any of these levels is a problem of political economy—indeed, of politics. I may have been a little unfair to Mr Osborne when I identified him with President Hoover. After all, Franklin Delano Roosevelt was elected on a commitment to balance the budget; then, faced with the economic reality, he had the political flexibility to change his mind and to implement expansionary policies. That is the flexibility and political intelligence that the Chancellor of the Exchequer clearly possesses and Mr Osborne clearly does not. We should be grateful that my right honourable friend Mr Darling is at the helm in these troubled waters.

Lord Naseby: My Lords, I declare an interest as chairman of an investment trust. Before I start my speech I shall reflect on Parliament's role at the moment. As my noble friend sitting on the Bench in front of me has mentioned, we have been back for four weeks, before which we had a very long recess. I really do not understand why Parliament was not recalled just because there was a whole host of party conferences. Frankly, Parliament has failed the people at a time when we face the direst economic circumstances that any of us in this Chamber or in the other place has ever faced.
	In congratulating my noble friend on the Front Bench, with whose speech for once I totally agreed, I raise two issues: regulation and small businesses. They have been highlighted by several speakers, principally the noble Lord, Lord Bilimoria, who spoke about small businesses, and my noble friend Lord Lawson, who raised regulation.
	I start with regulation, because that is the macro-dimension. My noble friend was right: banking supervision is vital to the future and has been missing for a decade—we are all feeling the results of that. There is no point in the new chairman of the FSA saying that he needs more people. He already has 3,000 people working for him, at a cost of more than £300 million a year. The FSA, sadly, has never worked. I suffered when I was chairman of a small life assurance company from the way in which the FSA dictated to everybody about the millennium bug, and not a single problem with anybody or any business arose. The FSA was totally asleep over Northern Rock and, as others have mentioned, during the period when it was responsible for Equitable Life. It had absolutely no idea how to react to the sophisticated financial instruments that we have seen created during the past decade. What is needed within the FSA is a complete switch of resources to proper regulation, to anticipation and to working with economists—academic and applied—and a removal of needless checking of information to the consumer. Will it do it by itself? I doubt it. It needs an urgent independent inquiry into how it has failed and a way forward—or a road map as the noble Lord opposite just said. However, I emphasise the urgency of the situation, because everything happens very quickly in a global market.
	Many commentators have noticed how different is the speed of reaction of the authorities in the United States from that of those in western Europe, particularly ours. Why cannot we move with more speed? Why do we dither, deliberate and discuss, and so rarely act? Interest rates have to come down now. When I was at Cambridge, also listening to lectures on Keynesian economics, we had a run on sterling in 1957. Interest rates were put up by 2 per cent overnight. Why can they not come down by 2 per cent overnight? The interest would still be 2.5 per cent, which is way above that of the United States.
	I turn to small businesses, because they are practical side of our economy. Thirteen million people are dependent on them, which is a very large proportion of the workforce of this country. I have a number of action points for the Minister, who has now joined us—and very welcome she is, too. If she will tick at least three or four of them, we might get some support for small businesses. I should like to see action to freeze or reduce business rates—it can be for a limited period, but it would be a practical benefit to all small businesses. I should like to see action to suspend any new employment laws, which can be introduced at a later date. I should like to see action to withdraw the policy of charging rates after three months on empty properties—that is not working and is costing the nation dearly. I should like to see action on bank loans and overdraft rates, so that when they are renewed, they cannot be increased nor have terms changed—one of the great problems for many of our small and medium-sized businesses at the moment is that they are being changed. Why cannot stamp duty on any property under £500,000 be charged for a limited period at 1 per cent, which would help the housing market? The Government should support the campaign for retailers' rents to be paid in arrears rather than in advance. I should like to see action taken so that all new leases can be upward or downward. I also support the plea for the small loans guarantee scheme to be introduced.
	The Minister, whom we welcome to the Front Bench, said twice that the Government are taking decisive action and are determined to help. Does he not realise that the alleged £4 billion of support from Europe over four years, handled by the banks, is pretty useless for every small and medium-sized business and retailer in this country? Those are the front-line troops who are sustaining the damage at the moment and will continue to do so through the winter and into the spring. If they are to survive this massive downturn, they need action and help now, this winter and next spring. Keynes will not help them any more than he did Denis Healey or Jim Callaghan.
	In medicine, early diagnosis followed by remedial action saves lives. Small businesses are like people: the diagnosis has been made; now we need sensible and specific action to restore the patient to good health.

Lord Watson of Richmond: My Lords, there is something rather statuesque about the title of this debate; that the House,
	"takes note of the current economic situation".
	The words are neutral, even bland, when the reality, as we all recognise, is so serious, so significant and so surprising, even though some of us may claim with hindsight to have felt an early unease, rather like sensing turbulence in an aircraft before it really starts to bounce.
	Last week, I did a lot of flying, mainly visiting companies on the Continent. I shall share something of what I heard to illustrate the extent and rapidity of the recession that we now face. Major computer software suppliers compared the present situation with a tsunami, because they felt that they had built in counter-cyclical barriers of many kinds, broad ranges of products, ranges of clients from SMEs to multinationals, and ranges of geographies from China to the US and Asia-Pacific to Latin America. Yet, virtually without warning, the recession has overcome all those barriers.
	Car manufacturers said to me, "Suddenly, we have hit a concrete wall". Retailers said that they had moved within a matter of weeks from anticipating the Christmas season to fearing it deeply. Everyone to whom I spoke used the word "unprecedented", yet there is something very predictable and precedented about our response to this crisis. There is the precedent, much discussed this evening, of Keynesianism. The signs are that the Government believe that part of the answer is to spend our way out. Yet, as the right reverend Prelate the Bishop of Chelmsford pointed out earlier, there is something counterintuitive about borrowing and spending our way out when it was borrowing and spending that got us where we now are.
	However, the real challenge about the Keynesian precedent is that it was for an industrial manufacturing recession in the 1930s. In the United Kingdom at any rate, we are almost living, rightly or wrongly, in a post-industrial society. The main impact on jobs, as is now widely realised, will be in the south and in London rather than in the north. The question, therefore, is: will Keynesianism work for a post-industrial society such as ours?
	During the opening speeches today, there was more than a whiff of the hustings. We were hearing the exchanges that an early general election may make inevitable: "Whose fault?" "To what extent is it the result of government error or Downing Street hubris?" "Would the main opposition party have done any better?". As far as the Liberal Democrats are concerned, with Vince Cable we would of course have done better.
	However, one thing is very clear. Whatever we do, and whoever we blame, we cannot and will not return to where we were. When this crisis is over and the recession recedes—and it may take a time—our world will be different. In what ways will it be different? I shall suggest four, although there are many more.
	First, there will be a technical but important change. The mark-to-market rules introduced last January by the International Accountancy Standards Board required banks to report their assets daily on a fire-sale basis. The European Union persuaded the IASB to relax these rules, but only after inter-bank lending had dried up and Lehman Brothers, among others, had folded. We should be very wary about returning to the stringency of those rules. What is the Minister's view on the issue?
	Secondly, there is European co-operation. It got off to a decidedly shaky start, but it has been more effective of late in dealing with the credit crunch, if not with the recessionary crisis. Sarkozy and Brown have both said—Sarkozy more openly than Brown—what a good crisis they have had. What does the Minister see as the thrust in terms of European co-operation, particularly EU co-operation, on recession rather than the credit crunch and the banking crisis?
	It may well be—this will not be good news for everyone in the Chamber—that one of the long-term gainers from this may indeed be the euro. Hungary and others want the shelter of the euro, which is not surprising. The latest opinion polls from Iceland show that the Icelanders after the turmoil of the past month are reconsidering their position.
	Thirdly, there will have to be a new architecture—a successor architecture to Bretton Woods. My noble friend Lord Newby, who is in his place, was right earlier to insist that whatever emerges in terms of new architecture, China and India must be given the say that their economic importance and clout requires. There cannot be any further delay about this. What is the Government's timetable on that? How are they going to move this agenda forward?
	Finally, tomorrow the Americans choose a new president. The reality of the crisis that we have started to experience, and which we will now experience for quite a long time, is that there are no hard or soft powers. There is no Mars or Venus. There is no unlimited sovereignty for any state, no matter how powerful it may be. Every state is vulnerable. Interdependence is where it is; unprecedented co-operation is what it is about. In the new landscape, every country and every continent is joined. In Washington, in London and throughout the world, grasping this reality can be the one true gain from this appalling global misfortune.

Lord Ryder of Wensum: My Lords, after succeeding Tony Blair, Gordon Brown published a Green Paper on the constitution, in which he pledged to redress the balance between Parliament and the Executive. However, Parliament was not recalled during the Summer Recess, and we have had to wait weeks for this debate to take place in your Lordships' House.
	A few noble Lords took part in a lively Finance Bill debate in your Lordships' House on 18 July, two months before the collapse in the markets. By July our public finances were already in disarray. I submitted that borrowing would reach £70 billion by the end of the financial year, which is about double the forecast the Chancellor made last March, and that the duty to restore our finances would fall to the next Administration—indeed, that fiscal policy would dominate the daily lives of future Downing Street residents, and that their reputations would be defined by their success in tackling the mounting deficit. That was in July.
	If anyone doubted the identity of the person responsible for this upheaval in our public finances, then the noble Lord, Lord Desai, gave the answer in his Evening Standard article on 22 September. He declared with all his authority:
	"The Golden Rule was fudged and fudged again until Alastair Darling inherited an empty kitty. Brown talked of prudence but the Public Private Partnerships have saddled us with a lot of debt off the balance sheets. Those chickens will come home to roost".
	The Prime Minister promised to eliminate boom and bust, yet months ago the IMF concluded that Britain was the one major economy likely to suffer a recession, partly due to the incompetent management of its public finances. The IMF fears were confirmed when public spending figures published a fortnight ago showed the worst first-half borrowing statistics in this country since 1946.
	Our public finances are now even worse with the cost of the Bradford & Bingley recapitalisation and commercial loan guarantees. Net debt is heading for 50 per cent of national income, excluding off balance sheet items. To complicate matters, I read that the Government are putting their faith in Lord Keynes. I do not want to digress down this alley, but I cannot help remark that, although an admirer of Keynes, I fear that some Ministers proclaiming his name have never read or even understood his works. His propositions are often taken out of context, as was the case in Japan in the 1990s when recovery was bungled by overborrowing. Sometimes Keynes's fiercest disciples are not true Keynesians, as the great man recognised towards the end of his life.
	The real scale of our debt could be two, even three times greater after accounting for PFIs and public sector pensions, to which many of my noble friends have referred. Public sector pensions are the costliest dimension of our hidden millstones.
	The independent Pensions Policy Institute published a report last month. It stated:
	"It is often assumed that better pensions in the public sector make up for lower pay. Although a job-for-job type comparison of pay is difficult to make between the private and public sectors",
	the evidence suggests that pay in the public sector is not lower than pay in the private sector across the board. In other words, the rule of thumb that decent pensions compensate for lower public sector pay no longer holds true. In addition, public sector staff tend to work shorter hours with stronger job security, take longer holidays and more sick leave.
	Gold-plated pensions are becoming indefensible, the more so now that Mr Brown has increased the size of the public sector by nearly 1 million employees. Whereas the latest unemployment figures showed an extra 300,000 private sector workers are jobless, they revealed an increase of 4,000 employed in the public sector.
	Expressed in stark terms, it is held that UK private sector workers are paying more in taxes to fund the pensions of the 20 per cent of the labour force in the public sector than they save for their own retirement. Payments into personal and company pensions totalled £15.6 billion in 2005, while in the same year £18 billion was used to pay the pensions of public sector workers—and that was a good year.
	Of course, the inequities have multiplied since the collapse in the markets, leading to hundreds of billions of pounds being wiped off the value of private sector pensions. The Government's response over 10 years has been scant: savings from reforms amount to no more than £13 billion over 50 years. Further reforms were of course vetoed by the public sector unions, Labour's paymasters.
	Treasury officials should start preparing a White Paper on public expenditure for 18 months' time, setting out three objectives; first, the reduction of money supply by controlling government borrowing; secondly, the restoration of incentives by holding down and, only if possible, lowering taxes; and thirdly, a plan for spending, including public sector pensions, that could be compatible with the objectives of borrowing and taxation, with a realistic assessment of the prospects for economic growth. These were the aims of the 1979 White Paper. They worked then, and they must work again.

Lord Taylor of Warwick: My Lords, someone once said, "Greed is good". That was the dreadfully misguided mantra of Gordon Gekko. He was the mercenary financial trader, a character played by Michael Douglas in the Oscar-winning Hollywood film "Wall Street" in 1988. The film ended with Gekko in ruins when his greed backfired, but Oliver Stone, the film's director, was dismayed to see that Gekko became a hero to many wannabe financiers, rather than a warning. Considering the credit and casino-type banking culture which then dominated the next 20 years, the moral of the film was ignored.
	Our whole finance and economic system is based on confidence, which is sometimes not objective or rational. There was a time when the City and Wall Street were seen as the masters of the universe. No longer. The scale of the financial and economic downturn has surprised many. Loss of confidence has fathered the fear factor. Economic forecasters now seem less like Mystic Meg and more like "Mystic Mug". Even in this noble and learned House, no one can confidently predict whether the Dow or FTSE will rise or fall tomorrow.
	I agree with the charge sheet highlighted by my noble friend Lady Noakes at the beginning of this debate. No one doubts that there is a global recession, but the Government did not save for a rainy day. That is a fact, and it is not only raining now—it is pouring. However, we are where we are. The Government had a dilemma when the failing banks approached them: to buy out, bail out or burn out. We have a rather uncomfortable "Strictly Come Dancing" situation, where the so-called professional bankers are now expected to waltz in tune with the amateur, ordinary taxpayers who have bailed them out. The problem is that we do not know whether the Government's plan will work.
	The banks do not need more regulation—they need effective regulation. In this, I agree with the noble Lord, Lord Powell of Bayswater, and my noble friend Lord Forsyth. We know that the market should not be allowed to operate in a moral vacuum, or we will continue to have executives being rewarded for failure. OPEC, which represents the world's major oil-producing countries, has tried to hold the world to a price ransom by restricting the production of oil. It literally has us over a barrel. There needs to be not only more effective regulation but a different culture, where enterprise and ethics can mix.
	However, the Government have an ongoing problem. In a national and global recession, they still need to provide the right economic conditions to create jobs and supply public services. The answer, in my view, is not the Government's solution, simply to borrow and spend more. This is the time to harness the innovation and expertise of the private and voluntary providers. I am pleased to hear that this is something that a Conservative Government intend to do.
	By that I mean social enterprise, which has been described as the Cinderella sector of the British economy. It needs a higher profile, when you consider that it comprises at least 55,000 enterprises, with an annual turnover of more than £27 billion. A social enterprise is a business with the primary objective of ploughing profits back into the company or the community. Yes, it wants to make a profit, but not profit alone. It is not driven simply by the desires of the shareholders and owners. This economic model enables Governments to tackle difficult social problems without an increasing drain on the public purse and the taxpayer.
	Despite its growing importance, social enterprise is still under-researched compared to more traditional firms. A good example is the Co-op bank. I have no financial or other link with the Co-op, but it has over 6.5 million customers, and is the largest consumer co-operative in the United Kingdom. It is interesting that the Co-op bank, along with the other members of the UK's ethical banking sector, is not only surviving the meltdown but experiencing new levels of consumer confidence and investment. Started in 1872, the Co-op bank puts its success down to the fact that it is a prudent lender, and transparent, with a code of ethics.
	Profits at the Bristol-based Triodos Bank are up 50 per cent. My point is that many banks in the mainstream sector are suffering and asking for help while banks in the ethical sector, doing it the right way, are actually thriving. Maybe there is a lesson to be learnt there. Outside the banking sector, the Nuffield Hospitals are another example of a social enterprise that is actually working. Social enterprise is based on the recognition that innovative solutions to the world's economic and financial problems are unlikely to come from markets left to their own devices.
	In the present economic climate, some companies may be tempted to cut back on training and education. That would be a false saving, a disaster. The Government must continue to encourage business to develop the skills of its workforce. In this I agree with the excellent points of the noble Lord, Lord Bilimoria, echoed by the noble Lord, Lord Haskel. This country needs small business. It needs business to create wealth; no Government can do so. To overtax and overregulate small business is a step backwards. The noble Lord, Lord Bilimoria, made some excellent points on behalf of that sector, which we must take into account.
	The noble Lord, Lord Powell, also stressed the vital importance of trade. I was recently in Geneva at the parliamentary conference of the World Trade Organisation. It was pointed out to us that the Doha round of talks started nearly eight years ago and has still not reached agreement. That is a disaster for the world, especially for its poorer countries. As the noble Lord, Lord Powell, said, the sentiment was that, as trading nations, we must build bridges between nations, not walls.
	In conclusion, you do not have to be a prophet to make a profit. However, this recession is a time for fresh, creative thinking out of the box. We cannot have a financial system which allows a hedge fund boss to pay less income tax than his office cleaner. It is time for fresh thinking. Seek, and ye shall fund.

Lord Sheldon: My Lords, in examining the economic situation, the share price volatility has been commented upon as being staggering. We have seen prices substantially increasing one day and then falling sharply the next. These daily changes have continued in a way that we have never seen. As well as those fluctuations, oil prices rose to nearly $150, and then fell to $60. We are seeing a world financial decline that is partly a consequence of this very long-term expansion of the economy which prompted the enormous increase in house prices. They rose spectacularly and played a part in the first global crisis that we have seen.
	The planet is integrating economically in a number of ways, in particular through the production of goods for export and the limitation of imports. These factors and the demand for oil all affect a large proportion of the world's economy. In regard to the price of oil, Gordon Brown told business leaders in Edinburgh last week that it was a tragedy that the world is a prey to one volatile commodity that can disrupt businesses and people's lives through a trebling of prices over a very short time. What is needed is a more stable energy price, not a volatile one. Petrol prices should be coming down much more than they are at present. In connection with the up and down oil price, the Prime Minister's four-day visit to Gulf states is a measure of its importance. The Prime Minister, referring to the oil producers, said that their interest is in a stable energy price, not in the massive volatility we have seen where oil prices have shot up and then come down again. What is required is for the economies in different countries to move closer together. China and the oil states are more and more dependent on the world economy, as are, indeed, all the major countries. There is to be a most important international meeting on 15 November, when this new world economic change will be debated. Some co-ordination is to be hoped for. It will be difficult, but if it succeeds there will be a most valuable consequence. So far the oil situation has indeed led to global financial turmoil. Interest rates are still high. They are reducing, but not by as much or as soon as is needed.
	My noble friend Lord Barnett pointed out that the increased borrowing must lead to quick spending, but it is uncertain whether we are going to get that speedy spending. The Government's spending normally takes a long time to come into effect. If it takes that long, we shall not see the sort of consequences that have been envisaged. What we are seeing, of course, is that further Bank of England decisions to cut interest rates must have consequences even though the further cuts may not guarantee cheaper mortgages, as was pointed out in Saturday's Financial Times money section.
	A major change is that government borrowing is inevitable. The Conservative shadow Chancellor, George Osborne, has said that a spending splurge is a mistake. He has said that we cannot spend our way out of a recession. Borrowing to stave off recession leads to economic ruin. In commenting on this, the Liberal Democrat MP Vince Cable rightly said that Osborne had shown poor judgment, which is a view that I also hold.
	In a most important statement, the Prime Minister has said that oil-rich Gulf states must play their part in stabilising world oil prices. The fact is that if oil prices rise and fall at the rate and frequency with which they have been changing over the past year, the use of oil will not be anywhere near as steady as the producers must wish. The oil producers are not likely to advance their position by limiting themselves to general agreements on each country's output of oil. There is a need for producers to have a closer dialogue with national consumers. There is a real need for a wider international understanding of the world's requirements and the producers' output.
	The major problem we have now is the financial squeeze. Turnover is down. Companies are not so profitable. Bankers are uncertain of their clients. They are not lending as the economy requires. We have to press for the price of oil to continue to decline and for interest rates to be substantially lower. These are not necessarily the solutions to our problems but they are an essential part of the tasks confronting us.

Lord Bates: My Lords, it has been a privilege to listen to this debate for the past five hours, which has increased my understanding. I am sure that the wisdom uttered here will benefit the Government's deliberations, which prompts the question about why this debate was not held earlier, and certainly the question about why it has not been held in another place.
	I hope that I can be helpful to the Government in thinking through this and adding to the context of the debate. I think that the best way I can do that is to take this from the macro and global level to the regional level. I am from the north-east of England; I am for the north-east of England. My passion is education and enterprise. I am proud to declare an interest as someone who is involved in three small to medium-sized enterprises in the north-east. If the House will bear with me, I wish to spend a few minutes talking about the experiences of business in that region. The survey of business confidence and business insolvencies, which came out this morning, indicated that, sadly, so far this year, 365 businesses in the north-east have gone out of business. That is a 43 per cent increase over the same period last year. Earlier, it was speculated that the effect of this recession has been felt most in London. However, the rate of business failure in the north-east is twice the national average. That is being matched by rises in unemployment. Last month the rise in unemployment in the north-east was the largest for 20 years. Already the unemployment rate in the north-east is 7.7 per cent—the highest in the United Kingdom.
	The failure of businesses is not only a personal tragedy for those involved in them—I know some of those people, who are outstanding business people and I shall come on to some of the reasons why their businesses have failed—but constitutes a reduction in the number of businesses in the north-east that the region can ill afford. We have by a long chalk the lowest stock of VAT-registered businesses in the United Kingdom. Scotland is second. The north-east is a long way behind. Our economy is too heavily dependent on the public sector, which accounts for some 68 per cent of our regional GDP; only 32 per cent is in the private sector. We know about differential rates of growth between the public and private sectors. Therefore, one can see a gap emerging in terms of wealth, prospects and social mobility between the north and the south. That is to be deeply regretted, and it is something that I am concerned about.
	I will move on to sharing a few ideas about how one might begin to tackle this problem. I appreciate that it is a confidence problem. We have talked about the failures of the banks, and I accept that, and we have talked about the failures of the Government, and I am sure that there are lessons to be learnt there, but one must also remember that the good old British consumers have been another party to the problem. They have availed themselves of the credit that has been available at incredible rates. Although one can understand that it was difficult for them to resist blank cheques appearing through the post asking them to fill in the amount, send it back and receive the income, the reality is that we have all been caught up in the irrational exuberance of the consumer economy. In that, the House will reflect well on the remarks made by the right reverend Prelate the Bishop of Chelmsford, and perhaps we will learn lessons from them.
	I shall give a few examples. One NorthEast is the regional development agency, and it is always open to criticism, but it does a pretty good job in many areas. On learning of the scale of the financial crisis, it announced that it would make £10 million available to help small businesses in the north-east, which is totally laudable. To do that, it is going to set up a new fund, which will take six to nine months to distribute the money. One of the things that we talk about in this House is energy efficiency, and that idea should be adopted by Governments as well. For example, there are 30 agencies in the private and public sectors which could easily distribute that fund and get it quickly into the hands of the small businesses that desperately need it because of the drying up of credit lines with the banks. Why do we have to invent something new? That is taking our eye off the ball. We should use what is there to its best effect, and the plea is to distribute the money as quickly as possible.
	I hear some criticism of my right honourable friend the shadow Chancellor, but he has made some very interesting suggestions that are practical solutions. I offer two of them in addition to those that were eloquently put forward by my noble friend Lady Noakes in her opening remarks. There are two suggestions that would really benefit small businesses. First, there is the idea of the VAT holiday for two quarters; six months. That is practical credit that, for a small business, might mean an extra £50,000 or £100,000 of credit coming at a time when it really needs it. Secondly, there is the idea of a review of the insolvency law to see whether there is scope for some British equivalent of chapter 11 that one might have in the north-east, so that good businesses are not unnecessarily forced to the wall.
	My next point relates to Northern Rock, which was, and still is, one of the bastions of the economy of the north-east. It employs 4,000 people, although sadly 1,300 have lost their jobs. We have a responsibility to examine Northern Rock. Its practices in terms of repossession have been overly harsh. The repossession rate is three times that of the national average. It is not a criticism to say that because the Government now have a stake in Northern Rock they ought to be telling it how to run a bank. I would be saying that whether Northern Rock was in the private or public sector. That multiple is too high, and it bears too much inconsideration for the difficulties that many people are in because of the rise in unemployment and the fall in base rates.
	My time is up, but I have a final point. Crises such as this one, in the classic sense, provide opportunities to do something for the long term. There are two things that I encourage the Minister to think about doing in the north-east that would make a great difference for the long term. First, the Minister should consider locating one of the Government's enterprise academies in the north-east of England. We need to embrace entrepreneurship and enterprise combined with education in the north-east. Leaving a legacy up there that comes out of the crisis would be very good.
	Secondly, there should be infrastructure investments. The dualling of the A1 north of Newcastle to Berwick and the upgrading of the western bypass would amount to just £650 million. You could have all that done, and when you are throwing around £500 billion, that seems like small change. If the Government could slip that in along with the other invoices, I am sure that the north-east would be very grateful.

Lord Sheikh: My Lords, I accept that the present economic situation has been affected by global economic factors, but it must be stressed that it has been greatly aggravated by the Labour Government's complacency in constructing an economic boom on a mountain of debts. The Labour Government abandoned the principle of prudence and they have failed to follow a monetary policy to deal with demands. I declare that I am chairman of an insurance brokering and financial services organisation and have always believed in building sound reserves and controlling the company's expenses.
	The Government's borrowing probably now exceeds £60 billion and it may reach £110 billion by 2011. In addition, it must be pointed out that the economic crisis will result in a reduction in tax revenues and there will be a need to spend more on benefits. The country has borrowed heavily and the population has a serious debt problem, and this problem is likely to continue for some years. It may be difficult for the Bank of England to cut interest rates as fast as is necessary.
	I remind your Lordships' House that, in 1997, Mr Gordon Brown stated that,
	"we have learned from past mistakes ... you cannot spend your way out of recession".
	What is the Prime Minister doing now? He is reneging on that statement. Higher borrowing will result in higher taxes and we need, therefore, to follow a monetary policy and keep control on public finance and borrowings. The Government's approach to fiscal management has not earned them much credit. Their failure to control public and private spending over the past decade has created a debt level that is irresponsible and unsustainable. The value of the pound has plummeted, and we are entering a boom-and-bust scenario. The Government failed to make hay when the sun was shining.
	In my business, I have dealt with mortgages and have practical knowledge of the subject. One reason for the problems was because building societies converted into banks, threw away the principles of mutuality and ignored the practice of prudence. I lay the blame at the financial institutions which have been irresponsible in their lending practices. The FSA and the Bank of England should have exercised better control and supervision of these institutions. The supervisory regime needs to be strengthened and be much more thorough.
	Small businesses account for 99 per cent of the firms in our economy, and contribute 59.2 per cent of private sector employment and 51.5 per cent of private sector turnover. I am a great supporter of small businesses and, therefore, welcome the proposal that an incoming Conservative Government would cut the rate of tax for small businesses and, furthermore, set up a procurement budget for small businesses. Our approach does not stop there, as my party has announced deferment of VAT bills for small and medium-size enterprises, initially for six months, and the cutting of national insurance contributions for smaller businesses. My party proposes to apply a freeze on council taxes. It is also important that we revitalise the regions, and building high-speed rail links between various parts of the country will help us to achieve this.
	I am great believer in following a monetary policy with fiscal responsibility, and it is important that we consider putting that into practice to enable us adequately to deal with the financial crisis. We need also to consider the relative weakness of our economy and how best we can prepare to ensure that we are better able to minimise the pain caused by future downturns. It must be appreciated that we do not fully possess the necessary skills. It is important that we build those skills by better education and suitable training, and back these with resources and investment.
	For too long, our wealth has depended upon property and financial services. We need to develop a range of measures to create a more balanced and resilient economy. It is fundamental that we increase our economic base and expand more science and high-tech services. We have an opportunity to become world leaders in the development of green technologies and innovation. We need more engineers and high-level manufacturers. That must be a key priority. We are not encouraging enough people in high-level engineering, in which we have led the world. I was brought up in a colony and everything important was marked, "Made in England". I am pleased that there is a resurgence of our motorcycle industry and that the Norton name has come back.
	The strength of the financial services sector as a key player in the United Kingdom economy has been a good thing. My own business is financial services, but we need to ask ourselves whether we could have done more to ensure that the manufacturing sectors could have been more competitive; but let us look to the future and establish and build on what has been lacking in the past.
	Finally, we have to confront the need to change our broken economy, but the present Government have shown that they lack the credentials to make the necessary changes. I say that with a deep sense of regret. We need to make changes swiftly but, given that the Prime Minister and the Chancellor of the Exchequer are caught in a collective denial, it is unlikely that they will be able to identify what needs to be done, let alone make the judgments necessary to repair the damage.

Baroness Valentine: My Lords, this is a timely debate and I am grateful to the noble Lord, Lord Myners, for its scheduling.
	Rather than repeat the many wise points made earlier, I base my remarks on my experience of London business over recent months as chief executive of London First. Indeed, the Minister, in one of his first official engagements, shared a breakfast with London First business leaders, where he displayed his strong grasp of the then acute challenges facing the financial services sector and the Government's strategy in addressing them.
	Fundamentally, we must prepare and strengthen ourselves for the upturn, while seeking to reduce both the impact and duration of the dip. First, we need to step up investment in infrastructure. We could learn not just from Keynes and from Louis XIV's Colbert but from Maharaja Umaid Singh, who, in the face of famine and drought overwhelming the Marwari people, commissioned in 1928 a great palace—the Umaid Bhawan Palace. It employed many hundreds of Marwaris for some 15 years, transforming the short and long-term fortunes of Jodhpur, its capital. Closer to home, I trust that our downturn will not bring famine, nor last 15 years.
	We have existing commitments to economic infrastructure, such as Crossrail and Thames Tideway, but London also has both unfunded transport projects and those which could be accelerated—for example, the modernisation of the Tube and phase 2 of the East London line. Work can start now if the funding is provided, providing activity and jobs now while building our capacity for future growth. They are London's equivalent of the Maharaja's palace.
	We should also invest in social infrastructure, increasing the new Homes and Communities Agency's budget so that it can be an active investor in housing development in London. This would both stimulate the private sector and enable the public sector to acquire new, much needed social housing while prices are low.
	We also need to invest to support London's future growth. Of course we must deliver the Olympic Games cost-effectively, but we must not mix up investing in the long-overdue regeneration of the East End with this cost. The Olympics provide a once in a lifetime catalyst: we must invest the public money necessary to provide the foundation for the private investment which will turn the East End into a powerful part of London's future. For example, why are we scaling back the Olympic village on the one hand while stressing the need for thousands of houses in the same area?
	It is a myth to think that low borrowing makes you a saint and higher borrowing a sinner. What matters is where the money goes, and London, the engine room of our economy, will deliver a decent return on investment for our hard-pressed Treasury.
	My second area for action is to look afresh at regulation. There are areas—most obviously, financial services—where action is needed. Boardrooms and regulators need to understand fully the risk profile of the products and services which they trade and oversee. We need proper risk management without undermining competitiveness. That is not necessarily heavy touch or light touch; it should be right-touch regulation.
	So we need no knee-jerk response; instead, we need thought-through global co-ordination, and no one should pretend that that is easy. The British Government's recent impressive international leadership must continue—to avoid regulatory arbitrage and ensure that international regulators, whether in Brussels or Basel, do not take short-term, short-sighted actions. For instance, in the longer term, it makes no sense for the failure of a bank such as Lehman's to be treated so differently by authorities in the US and the UK that the market may be skewed to the disadvantage of its creditors, customers, workforce or competitors.
	Equally, we must guard against overzealous UK regulation, which will simply drive business offshore. The competitiveness reviews of financial services commissioned by the Chancellor and London's mayor before the recent crisis should provide real-time input to policy-making.
	We also need to look more widely at the impact of regulation; now is not the time to load extra burdens on business. The Planning Bill before this House places a new infrastructure levy on developers. We need to ensure that it is a practicable measure which will support, rather than deter, investment. Similarly, the Government should not be starting to levy full business rates on empty properties, hitting businesses when they are down.
	Finally, in these difficult times, I reiterate that the UK's capital remains open for business. We need investment, we need to improve Londoners' employability, and we have to avoid more own goals on tax and regulation. But London remains, according to most studies, the best place in the world to do business. Our competitive advantage extends beyond the City, from world-class research and development, to visitor attractions and creative industries; from, as it were, the A and B of celebrated architecture and newly opened-to-the-public Buckingham Palace Gardens, to the Z of London Zoo. Londoners have skills, diversity and flexibility and, for dollar-based investors and tourists, our premium product is now surprisingly affordable.

Viscount Eccles: My Lords, I will concentrate on the short term. I suggest that the answer to the question, "How did we get into this crisis?", is only interesting as a guide to how and when we get out of it. Essentially, the crisis is Anglo-Saxon. It started in New York and London. Before we go any further, we should agree, I hope, that the Anglo-Saxon system has made a great contribution, since the mid-19th century, to the development of the world. Indeed, there has been no other system which has made anything like the same contribution. It has found its way through many excesses and it will find its way through this excess. Excess comes when testing the boundaries of innovation in the style of Ross and Brand.
	It is far too soon to condemn the Anglo-Saxon system. Indeed the United States of America may find its way forward quite quickly. It has a large and flexible economy and has shown that it can recover rapidly in past times of trouble. The United Kingdom is not likely to be able to recover so quickly, but why? First, it is a matter of public confidence. The point has been made many times in this debate that the public need to be confident; if they are not confident they will not spend, but save. At the moment, the public are bemused, almost shocked, because they did not expect to be here and nor do they think that anyone else expected to be here. From 1997 the economy had only one way to go: better and better. That was good news and people like good news in the same way as they do not like bad news. House prices had only one way to go. What was wrong with a 125 per cent mortgage? Why not take the waiting out of wanting? Renegotiate the mortgage, switch credit-card providers, hence the high levels of household debt. It was a disastrous example of mistaken political leadership, arousing expectations that never would be fulfilled. It is no wonder that the public now have no confidence in what they are told.
	Secondly, expenditure has consistently been called investment. This afternoon the Minister used the description "investment" at some point, but it is more prudent—a fashionable word at one time—to call it and treat it as current expenditure. True investment requires a financial return which is not available from NHS hospitals, nor from state schools. But worse, many of those projects—£60 billion of them—have been financed off balance sheet via PFIs, requiring taxpayers of the future to find some three times as much. What is the Government's calculation of the liability to be met year by year by the taxpayer over the next 30 years? There is no other way of repaying a hospital PFI project—UCLH cost £404 million—but by taxes. Hospitals in the NHS do not have a cash flow that provides them with an operating profit. Contrast that with the banks, which are now being told, probably quite rightly, that they should be transparent and should not finance things off their balance sheets without telling us the exact cost.
	It is no wonder that public confidence is so low, yet it is a vital ingredient of recovery. It is time we tell things as they are and stop underrating the common sense of the people. The sum total of the position—public debt past, present, future; household debt; falling house prices; and fast falling activity in the economy—means that the United Kingdom is in the worst position in the G7, and disagreeing with that proposition is to be in denial. Where is our Keynesian room to manoeuvre? Are we not caught between introducing levels of spend and debt that will cause further falls in the pound or a long wait as our position unwinds? It is a pretence to say that we lead. Ideas we may have; room to manoeuvre is denied to us. As has been said several times in this debate, lowering interest rates is not a remedy that will act quickly. Are we left with only one way out—inflation? We were completely unprepared for this crisis. We cannot lead; we will have to follow, which will become clearer and clearer to the public, who have been misled for long enough.

Lord James of Blackheath: My Lords, I came to this debate with a pick-and-mix text on the grounds that the debate would last a long time, there would be many theories and a great many points would be made. I find to my surprise that two of my points are left untouched. I am rather pleased about that. I was nervous that my noble friend Lord Higgins was about to demolish one of them earlier, but he nicely opened the lid on it for me when he talked about my main concern, which is the level of debt. In recent weeks, he has twice asked a question, which was not answered on either occasion, although we now understand the answer. The question was: how will the Government finance the money that they have put in to rescue the banks? The answer that we seemed to be hearing was that they would do it as they had previously done it, by borrowing the money back from the banks. That is rather self-defeating, as it would take the money that was going into the rescue back out of circulation.
	We now know, because we have seen the first of the successful auctions of the bonds, that the Prime Minister is sponsoring a major series of bond placements around the world, which will have to be repaid. I am not a bond expert but, when I tried to read the small print on them, I was surprised to find that they seem to be of relatively short maturity.
	My noble friend Lord Higgins said that there are only two ways out of the debt problem, but he is wrong. There are three, none of which is good. The first is taxation going up, which would just about finish us all off completely. The second is that we take cost out of our expenditure. The third, which he did not mention, is that we do what everybody does with a maxed-out credit card, which is to get another credit card to provide the money to pay off the first one. It looks as though we are likely to have to do that in the last year of the next Government, which is when, I think, the maturity date falls. I am sure that it is a coincidence that it will be the last year of the next Government, but we shall have to wait and see who is going to have to deal with it.
	However, we cannot wait until then for a solution; we need a solution now. I suggest that solutions could be harnessed now that would not be destructive of anything further in the economy and that the Government should now implement them. They should take a leaf out of Sir Robert Walpole's remedy at the time of the South Sea Bubble, when he possibly had even worse problems than we have now. He created a dedicated set of assets in a sinking fund that he could realise under his own control over a period and all those funds would go directly to redemption of those debts.
	The first place that we could look for that would be the Government's analysis of cost reduction from the Gershon report. According to the National Audit Office, the Government have implemented only half of that; the other half is available to do. That does not take out any services for the public benefit. Secondly, they could dust down the James report and take, say, half the value that we assigned at the time. That would not take out one hospital bed; it would not take out a single soldier; it would not take out one policeman or one schoolroom. If you put the two together—the rest of Gershon plus half of the James report—you would have enough to pay back the entire value of the bond already raised by the Government. If you do that for five years, you have effectively wiped out the entire debt to fund the whole of this exercise.
	The second thing that should go into the Walpole-style sinking fund is the recognition by the Government that the shareholdings that they have taken in the banks that they have rescued should be regarded as cashable cheques in future. The Government need the banks to recover financially and for their share prices to rise; at that time, the Government need to sell their shares. The best people to buy them will be the banks themselves and their existing shareholders, who were not able to do that this time round. Get the money back from the banks by selling the shares back to them within the five-year period, when the recovery comes. You should be able to do that without fiscal calamity or reduction in public services.
	I had an extraordinary meeting this morning with a personal finance adviser for one of the big clearers—not because I have any finance to invest, I hasten to add. He has been put in charge of his bank's portfolio of very rich clients, who have so much money to invest at the moment that they do not know what to do with it. I suggest that there may be some benefit in thinking on the lines of a war bond, whereby you might be able to harness the resources available on an attractive coupon that would recycle money back into the British economy from British resources. You should look to this as a possible extra dimension and as an alternative to fiscal imposition. If you swept the national balance sheet, you could get the money out in time to pay it back before you had to tax to do it.
	My last point is about our old friends Northern Rock, who started this problem. I have an unanswered question on this, which I put to the Government. We have been told recently by the noble Lord, Lord Davies of Oldham, that we should be proud that more than 50 per cent of the amount put into the rescue of Northern Rock has now been repaid. If it has been repaid, could we please have a restatement of the asset cover for what has not yet been repaid? I have done enough workouts to be a deeply suspicious person, I am afraid, and I suspect that someone has given an incentive to those who can pay to pay up early, which has got back the 50-plus per cent. That means that all those who cannot pay have progressively become the bad debt rump, which is left with an ever shrinking margin of assets security to cover it. Can we please have a definitive statement on what we are owed on Northern Rock and what asset cover we now have for it?

The Earl of Courtown: My Lords, as many noble Lords will be aware, this is not a subject on which I speak often. However, as a result of the plight of small and medium-sized enterprises in this current financial crisis, I am motivated to do so. I agree entirely with my noble friends Lord Bates and Lord Naseby and the noble Lord, Lord Bilimoria. I should declare an interest as part of the management of a landscape construction team in the south-west. The company is a typical SME, although it is slightly larger than the norm in the sector. The financial crisis has affected us, but our order book is still full and we hope that our success will continue.
	Quite rightly over the past few months, the media have reported extensively on the banking crisis in the financial news. However, the downturn in consumer confidence has been apparent over a considerably longer time and its effects have significantly reduced SME margins. From the early summer of this year, suppliers have increased prices. Until now, we have been reluctant to pass on these prices to customers and consumers, but our experience of trying to pass on those increases has resulted in a blunt refusal from the client. Due to the competitive nature of the industry, it is a question of accepting reduced margins or not getting the work at all.
	In the past week, we have had a 15 per cent increase in the cost of waste disposal as well as the same increase in the cost of concrete and aggregates. Not only does that hit the landscape industry, but it will also impact on the construction and building sector, on which the state of the housing market, as we know, has already had a devastating effect. It is of paramount importance that the Government should come up with a proposal that will have an immediate effect. I am not looking for a long-term effect. I understand what the Minister said in his speech, but the problem is now, today, this week. To get VAT paid in this month, the money should have gone to Revenue and Customs today. That is where small and medium-sized enterprises are having problems with their cash flow.
	A few weeks ago, the importance of SMEs increased with articles in the media and a Statement in the House. That is not strange when, as other noble Lords have mentioned, 13 million people are employed in this sector, which makes it important and influential. The Government announced that they would talk to banks about their lending activity, as well as arrange for an extra £4 billion from the EIB, which, as other noble Lords have said, is small beer compared to what is required. It is no good having that money available if the banks do not lend it on to small and medium-sized enterprises, which seems to be the case. I understand that in some cases banks are refusing to extend overdraft limits when requests come through to pay the Revenue and Customs. In other cases, facilities are being reduced, but at higher rates, and, as other noble Lords have said, we are finding a difference between the two rates in the market. At present, only one bank has taken up the option of funding from the EIB. I should like to know what effect that has brought into the marketplace—if the Minister is listening. The noble Lord, Lord McIntosh, used to do this to me frequently when I sat over there.
	The Horticultural Trades Association tells me that the industry employs around 285,000 people in 20,000 businesses. In other words, it is a highly fragmented industry, which underlines the fact that a form of central support or source of help is required. A number of noble Lords have talked about growth and the lack of it. My thoughts are that this sector will fast go downhill. There have been delays in projects, many cancellations of work from the construction industry, a potential drop in work from local authorities, which have been affected by the banking crisis in Iceland, and a general reduction in economic activity. News reaches me that even large firms in my sector are going out of business due to a lack of confidence, as a number of noble Lords have said, which leads on to the lack of liquidity.
	We have found that the factor most affecting us is that debtors are taking much longer to settle their invoices and that the payment period is greatly lengthened. The banks are refusing to increase overdraft facilities and in some cases enforcing reductions in overdraft levels. This has led to an increase in short-term cash-flow problems affecting small companies, in some cases putting them out of business. My noble friends Lord Bates and Lady Noakes mentioned a way to help on this: a VAT and income tax holiday. As long as HMRC does not set punitive rates or fines for late settlement, but keeps repayment terms in line with overdraft facilities, that would be perfectly acceptable to small businesses. Giving companies more time and some help would have an immediate effect.
	I am sure that I will be proved wrong and this is an arguable statement, but generally speaking companies fail through lack of cash flow as opposed to a lack of profitability. The Government have bailed out the banks; they must now come up with measures to safeguard British SMEs, which have become such an important part of our economy.

Lord Desai: My Lords, being No. 42 on the speakers' list and the last to speak from the Labour Benches is either a sign of due punishment for what I have said in the past or it is a sign that my Front Bench trusts me to be, like Franz Beckenbauer, a sweeper. I therefore take it as a compliment. This has been a fascinating debate and I will take my departing line from the noble Lords, Lord Lawson and Lord Lamont. I am surprised at how at how fickle is the belief in free markets. Having read my Marx and Hayek, I am still a believer in free markets. They work exactly like this: there are booms and there are busts, in which people go bankrupt. That is how free markets should work. When companies collapse and people say "The markets are not working" and become moralistic about capitalism, they are completely wrong. Capitalism is neither moral nor immoral; it is amoral. Those who believe in and benefit from free markets should, like responsible adults, be ready to pay the cost when they go wrong.
	I am a strong believer that when banks or financial institutions fail, one should not rush to rescue them. The American experience has been good in the sense that it has been one of horses for courses. The Americans let Lehman Brothers go, Bear Stearns was bought out, along with Wachovia and Washington Mutual, while AIG was saved. The point is that one has to be very selective about what one is going to rescue. What my right honourable friends the Prime Minister and the Chancellor have done is right: they have declared a facility available for bank recapitalisation. Unlike what noble Lords opposite think, they have not yet actually signed a cheque for £37 billion. They are encouraging banks, quite rightly, to seek finance themselves. If the banks can get themselves recapitalised privately, that is always to be preferred and is why punitive conditions must be attached to public money. If the banks want public money, they bloody well have to—I am sorry—they have to pay the price. I do not think that one should be kind to bankrupt banks. One should be severe, because the only thing they understand is money, and it should cost them a lot of it.
	So far, the way that the banks have been recapitalised has been very good. Equally, the way the bank guarantee has been provided is quite right. I like what the noble Lord, Lord Forsyth, said: we have not spent £500 billion. We have just said that the guarantee is available, which relieves the pressure in the market and allows confidence to return. That is a much more sensible approach to recapitalisation.
	There will always be cycles in capitalism, and in a sense one cannot do away with them. It is important to draw the distinction mentioned by the noble Lord, Lord Lamont, when he said that we have had stop-go business cycles for a long time. However, in reality these cycles are often due to mistakes in fiscal policy. There has been a long debate since the 1950s in British macroeconomics as to whether government policy exacerbates the normal cycle or not. My former colleague Professor Phillips wrote an interesting article on this, while Christopher Dow wrote a book. What my right honourable friend the Prime Minister was saying when he was Chancellor was not that he would eliminate the cycle but that he would not exacerbate it through mistakes of fiscal policy. That is what he meant by no more boom and bust. If people thought he would eliminate the cycle, that is just ignorance—I cannot help that—but I clearly saw it as a promise. By declaring a medium to macro economic policy, by not giving rise to surprises, a predictable fiscal stance would lessen the exacerbation of the normal real output cycle which goes on in any modern economy.
	What is happening now is not a cycle due to fiscal policy; it is a crisis due to a global financial market meltdown. It is due to the many financial innovations which have happened recently and to the fast IT equipment which leads to quick settlement of deals. Again, as the noble Lord, Lord Skidelsky, said, it is because most people at the top of the banks do not understand the nature of the business they are in. I have said before in your Lordships' House that the chief executives do not understand what the rocket scientists do. They thought they were reducing risks by securitisation but all that happened was they ended up holding each others' risks. Each thought they were spreading the risks to the others and, as they all did it together, they ended up holding each others' risks and did not even know what risks they were holding.
	That having been said, what is to be done now? The financial markets will have to do something about Bretton Woods. Again, I back the noble Lord, Lord Skidelsky, who said that we have to devise an instrument whereby excess reserves of countries such as China and others can be banked with the IMF—not with the United States, which would only go on to become spendthrift—give a good yield across different currencies and be recycled in the banks.
	As to domestic fiscal policy, expenditure will not work fast enough. We need either a postponement of VAT payments—a promise that no small business has to pay VAT for another two and a half years, or whatever you want—which will reduce the liquidity shortage; or a promise that the threshold at which taxation starts, which is currently about £5,500, would be substantially increased so that a number of people who are lower paid will pay less tax. The Chancellor should then say that that can be implemented now and people will be given lump sum payments calculated at the lower tax rate. That would immediately put money into people's pockets—and my time is up.

Lord Northbrook: My Lords, I am grateful to the noble Lord, Lord Desai, for reiterating government policy. Like other speakers, I am grateful that prime time has been given to the House to discuss the current economic situation. As I am nearly in the graveyard slot, I am quite surprised that I have got one or two original ideas still to add to the debate.
	First, as a former UK fund manager, I also welcome the noble Lord, Lord Myners, to the Government Front Bench. I was able to benefit from Gartmore's expertise for my clients, through its Far East and Irish funds in particular, and its performance contributed to the high regard that was held for him and Gartmore in the City when he was at the helm. His expertise will add enormously to our deliberations here. However, if he had been making a current fund manager presentation I think he would have offered a more balanced view of the UK economic situation.
	I should first like to make a few comments on the Government's stewardship of the economy since 1997. I then wish to iterate my view of the key causes of the current economic crisis, discussing the global and UK background, before coming up later in my speech with a slightly more original look at the possible solutions. I always give the Government credit for their key decision to hand over control of interest rates to the Monetary Policy Committee in 1997. I also have given them credit for keeping inflation in line with the MPC's target for part of the period after that. However, after their decision to stick to Conservative spending plans early on, I have been cautious about the effectiveness of the spending on health and education in particular, especially as the Budget deficit kept increasing.
	Continued growth made for overconfidence. As many speakers have pointed out, the Prime Minister claimed in March 2007 that he had abolished boom and bust. The serious argument that he was trying to make is that the situation we are in is at variance with the economic cycles of the 1980s and early 1990s—in other words, he was saying that the boom and bust we are in is not the old boom and bust. The trouble is, we have a new boom and bust. The old boom and bust featured rapid fluctuations, with a medium-sized boom followed by a medium-sized bust. This time we have had a long period of growth followed by a bust so bad that it has nearly destroyed the financial system. The stability was a trick of the light; the lengthy period of growth was fuelled by house prices and debt. The length of the good years has been paid for by the severity of the crisis we now face, yet still the Government do not seem to have learnt certain lessons.
	The Chancellor wants to return to 2007 levels of debt. That cannot be a good idea. To see why requires analysing the causes of the economic crisis. As many noble Lords have stated, the crisis has been caused globally by debt reaching unsustainable levels and by investors looking for higher yields in a lower interest rate environment without considering the risk. It began in the USA and has spread faster and more broadly than many of us would have predicted. In the UK it has differed crucially from the two previous economic crises, which were caused by high interest rates and high inflation. This is a balance-sheet recession, where inflation and interest rates have been low, low interest rates encouraged individuals to borrow more and buy property as it seemed to be going up in value for ever and ever, and financial institutions were prepared to lend on an increasingly reckless basis to finance the borrowings. In the USA this recklessness was emphasised by lending to so-called NINJA borrowers—no income, job or assets. In the UK, financial institutions were lending 120 per cent of the value of property.
	The UK has been particularly badly affected by the crisis because our economy, as many speakers have said, is dependent on financial services and the Government have gone on a borrowing spree. The level of borrowing has reached the top limit of its self-imposed financial rules, thus allowing no room for pre-emptive pump priming to stave off trouble. Nothing had been kept back for a rainy day. The USA and UK crises have had two key components: a crisis in the financial system and a crisis among households where personal debt has been high. The crisis in the financial system has not only been one of debt but a crisis of confidence in financial institutions lending to each other. It is easy to forget that the hugely successful investment banks were up to 30 or 40 times geared, so they were able to finance deals that now would never get off the ground. This is another example of, with hindsight, the overuse of borrowing. Debt got to an unsustainable level, and any sustained fall in the housing market was likely to lead to a crisis.
	A crisis in the financial system can always be bailed out by Governments, which is what has happened in this case. I give credit to the Prime Minister for his handling of this crisis, but we must not forget his Government's responsibility for it. Household debt is a separate issue. People try to rebuild their savings, which is very difficult. They cannot borrow any more money because the banks themselves are stretched, and the value of their housing has gone down. As personal income is not rising and people are trying to save, consumer spending falls off a cliff.
	How do Governments sort out the household problem? Mine is an amateur economist's solution, and may cause surprise. I have been cautious about the rise of inflation until recently, but now I believe it has peaked. In particular, sharply declining commodity prices and weakening demand will help, along with the slowing down of wages as job losses unfortunately hit the real economy. Like the noble Lord, Lord Bilimoria, I believe that in these exceptional circumstances, for a period, the Bank of England should relax its inflation target and allow it to remain at the current level so that the real value of debt will decline over a period. Thus I would support the Bill of my noble friend Lord Saatchi.
	In terms of UK fiscal policy I would, however, criticise the idea of big increases in government spending. Last week, the Chancellor of the Exchequer conceded that he would have to abandon the fiscal rules. Michael Saunders, an economist at Citigroup, said that the UK now has no credible fiscal rules. Without such rules, as the noble Lord, Lord Skidelsky, remarked, confidence will weaken and the cost of Government borrowing will rise in addition to its level increasing. At the end of the day, the cost of this will fall upon the taxpayer, even if he is given short-term government support.
	Here I would like to promote the Ricardian equivalence theory. Consumers will not increase spending if Government increase their deficits because they know that although they may have more money now, they will have to pay higher taxes later, so the extra saving by consumers would offset the extra spending by Government.
	The major economic action, as many other speakers have said, should be taken on monetary policy. I have until now fully supported the MPC's concern about inflation, but now that the threat is passed, it is time to lower rates, and lower them quickly. They should be pushed down to 1.5 per cent to 2 per cent. That will help weaken the pound further, which will aid our exports. That will, I hope, help boost the money supply, which has weakened due to the removal of the prop of support from hedge funds and the derivatives markets and the banks' crises of confidence. It is becoming common knowledge that even good companies are finding it much more expensive to renew bank facilities. Weaker businesses are finding it harder to borrow at all.
	Also putting pressure on companies and businesses are increasing pension fund deficits caused by the collapse in stock markets. Actuaries are insisting that contributions are increased. Profits, therefore, will be under further pressure; one route, sadly, to remedy this is job redundancies, which are likely to rise for these and for demand reasons. Therefore, interest rate reductions are crucial but even then they may not be enough to improve confidence in the short term of the real economy, which is likely to be weak for several years.
	I turn finally to regulation, on which I think I have something original to say. The incorrect knee-jerk reaction to the financial crisis will be to overregulate. Unlike what the noble Lord, Lord McIntosh of Haringey, said, what is needed is better quality regulation rather than quantity. Regulators need to be better trained and more experienced. They have to be fully up to the mark in the area of derivatives. They should tighten up on off-balance-sheet finances. UK regulators are very good at prosecuting minor offenders while the major culprits get off scot free. The UK needs to take a leaf out of the US SEC's book in bringing financial wrongdoers to justice.
	Overall, the tripartite regime introduced by new Labour has clearly not worked. More power needs to be given back to the Bank of England to monitor financial institutions' solvency.
	In conclusion, the Prime Minister deserves credit for his action on the financial crisis, but it must not be forgotten that he must take a lot of responsibility for allowing it to happen.

Lord Selsdon: My Lords, when you speak in the position that I do, you have spent all afternoon rather nervously adjusting your tie, feeling insecure, wondering whether anyone will say what you are going to say and then panicking because you are not quite sure yourself what you are going to say. Automatically, one should take a theme.
	I had a birthday last week, and I have passed the average age of Peers in this House. That is quite an interesting thought. Also, I have been in this House longer than anyone else speaking today. I had a flood at home, and the modem that connects me to the parliamentary intranet went dead, so out of all the information that I had researched for what I was going to say today, all I could find were my former speeches on the economy, which came to a total of five hours since 1971.
	I have a great respect for Front Benches and for the noble Lord, Lord Davies of Oldham. When, before the Recess, I asked him what the Government meant when they talked about boom and bust, he was rather like a first division goalkeeper on an ice hockey pitch. He answered very nicely but said nothing; it confirmed to me that what we get mostly from Governments is what I call useless information. "Useless" does not mean that something has no use; it is less use than anything you can think of at the time.
	Today, we have a new Minister. He is a man I have known of. I have listened to him in the past and have great respect for him, but he was given a most useless brief. I do not mean that it was of no use, but it was so useless that it was hopeless. That does not mean no hope; it means less hope than anything else you could think of. At the end, as noble Lords know, you either wind down or you wind them up. I was always told that you are not allowed to have notes or read a speech, because noble Lords shout, "Reading, reading, reading". I will try to stop exactly at seven minutes. I do not have enough to say, so I can bang on a bit.
	I wish to go back to banks and banking. I started my life in industry in asbestos, which was not the best thing to do. I finally moved into the banking business, which was also not the best thing to do. I had written reports on trade and went to work at one of the accepting houses, Singer & Friedlander. We had just become an accepting house—the last one after Warburg. When Siggy Warburg became a member of the accepting house, was there any point, anyway? Warburg never had people to lunch. I am the only person who has ever been to lunch twice with Warburg. When he decided that the house needed to talk to the outside world, he had two lunches every day.
	I learnt that in accepting houses—I was later with Samuel Montagu—your assets went up and down in the lift every day, but you had the Bank of England behind you. Of course, we in Samuel Montagu were owned by Midland Bank. What was the difference between an accepting house and a clearing bank? The accepting house had the Bank of England behind it, but the clearing banks were undoubted. That meant that the Bank of England had the clearing banks behind them. Occasionally, when I was on the committee of London clearing banks, I would have to go to meeting after meeting. You learnt the trick that to get to the Bank of England sometimes when it was raining, if you talked to your friends who had offices, you could go in through the back door and out of the front door without carrying an umbrella and you did not get wet, until the new Stock Exchange was built and the swirl of water around soaked you through.
	What we did with the Bank of England was fairly simple. We all knew that it was an unwritten rule that you could not lend more than 17 to 20 times your share capital in reserves. To put it another way, if you lose or write off £1 million, you reduce your lending by £20 million. If you lose £100 million, you write off even more until you cannot lend. You were not allowed to sell credit. You had customers, whereas accepting houses had clients—a subtle difference that I have never managed to understand. The point was that, in general, there were not enough people to have bank accounts. Only a third of people held bank accounts because the clearing banks deemed that only a third of people should have an account. You looked after your esteemed customer and had an unwritten rule, "Know thy customer". That was an important factor. The building societies should never have been allowed to be banks.
	I will not go on too much about this. I wish to return to an issue that was not raised. We do have a crisis, and if I were a seer or a prophet I suppose I would say, "As it was written in the stars, so it came to pass, and the people were sore afraid". The one question that bothers me is: what is our economy based on? The Government have announced that it is house building. I was a director of a big construction company for a long time. We had to close it down because we lost too much money building hospitals and we could not build houses profitably. Then it was built on public expenditure. The new aircraft carrier provides only 10,000 jobs, and what is its economic value when it is finished? I fully believe in the Navy. The Government then said that the economy was based on financial services. Which business in the world has collapsed more severely than any other? It is the financial services. What are we left with?
	There is worse than that. I was always involved in trade, which meant that I sat below the salt. My family would not explain to people what I did. Instead, they said, "He is something in the City", when I was nowhere near it. I sold things around the world. The worry is that we now have a balance of payments crisis. The deficit on visibles or goods this year will be more than £100 billion—that is my estimate, because the Government are late in producing the Pink Book. There is a surplus on services, which are mainly financial services, because we are losing balance-of-payments problems on tourism and so on. We therefore have an overall deficit of around £50 billion, which is the same amount as we have chucked into the banks. That is pretty worrying. The only future for this country lies in being international. It depends on international trade. If the Government would get off their high horse and join people such as me below the salt, we would have no problem.

Lord Shutt of Greetland: My Lords, it has been a long debate and a fair time since 3.15 this afternoon. I thought that we were being warned that the end of it was another five hours off, and it that it would be 2.15 am before I got cracking. We have heard a variety of views. Before I sum up, there are two issues in particular that I want to raise.
	There are two elements to the banking problem: first, that loans have been able to be dispensed to those who may not be able to afford the repayments; and secondly, that loans have been dispensed from borrowed money, not only borrowed short to lend long but borrowed short in bulk to lend long.
	Your Lordships will not be surprised that I shall refer again to the H in HBOS. As on the previous occasion, I declare an interest in that my son-in-law is an employee of HBOS in Halifax. The Halifax was formerly the biggest building society in the world, demutualised in 1997. In 2001, the merger with the Bank of Scotland took place, leading to the acronym HBOS. It is interesting that it was 63 per cent H and 37 per cent BOS, but the directors were seduced by the Mound and took the headquarters to Scotland. As a result, all that we have heard about for the past couple of months is "the Scottish bank".
	I asked previously whether the Lloyds TSB merger, or takeover, is really needed. Perhaps it was thought that this was one way out when Mr Brown tapped on the shoulder, but, bearing in mind all that has had to happen since in banking, one wonders.
	But who is interested in Halifax? The chairman and the chief executive of Lloyds TSB, Sir Victor Blank and Mr Eric Daniels, have been invited there. The Halifax Courier is running the headline, "Where are you, Eric?". We have had no visit whatever from anybody to do with Lloyds TSB, even though they have been invited by council leaders and the mayor. It is amazing that the word "Halifax" is now but a trading name of Bank of Scotland.
	It is significant; it is getting all this government money. What is the Government's view on Halifax? Where is the regional policy? In welcoming the noble Lord, Lord Myners, to his post, I note that we are dealing with a Cornishman. That gives me hope that someone who has regional roots may be concerned about the regions of England, and that financial services are seen as a matter not just of London and Edinburgh but of the English regions.
	The Scottish Secretary has announced a mystery bidder for the Halifax, but, yet again, he said that it is all about jobs in Scotland. Today, Lloyds TSB publicised its own proposals for the takeover and referred to £1.5 billion in savings. It is clear that those savings are about people on the payroll. I would be interested to know, as I am sure would your Lordships, where those job cuts are to be.
	Are the Government interested in jobs in Halifax and Yorkshire? I have seen the diminution of the regional dimension. Many of your Lordships will remember Martins Bank in Liverpool, Williams and Glyn's Bank in Manchester, the Yorkshire Bank in Leeds, the Halifax Building Society in Halifax, of course, the Leeds Permanent Building Society in Leeds and five building societies based in Bradford. Amazingly we now have Ministers of State for all the regions. What are these regional Ministers doing in terms of regional financial services and making certain that this is an important feature of our life in this country?
	My second and very different point is about the unintended consequences of some of the decisions that the Government have made in recent days. In 1946 I was taken to the Isle of Man with my bucket and spade. Therefore, I have had an interest in that place. I declare the interest as vice-chairman of the APPG for the Isle of Man. Perhaps because of concerns about people going to warmer climes it has moved to financial services and now has a thriving financial services industry.
	The Government here have put in administrators at the Icelandic bank, Kaupthing Singer and Friedlander. That has meant tremendous difficulties for its subsidiary in the Isle of Man. That bank was there because the Derbyshire Building Society had a Manx subsidiary. The Isle of Man is a Crown dependency. It has a tiny compensation scheme. What are the Government doing in their negotiations with the Icelandic Government to help it?
	Coming back to the debate as a whole, I think that there have been about 20 themes, starting with people wanting an inquiry, the delay in having the debate, the cost of food and oil, banking, overseas implications, inflation, interest rates, debt, boom and bust, regulation and supervision, unemployment, housing and repossessions, small business, tax, national insurance, fiscal policy, pension funds, education, Keynes, prudence and confidence. I have been marking—not on quality but on quantity. It is an interesting feature that, in terms of quantity, regulation and supervision has been raised most in this House. Clearly, there is tremendous concern about regulation and supervision, particularly as that applies to the banking sector. Banking has been raised time and again, as has small business. Keynes is coming up on the ropes as one of the features raised today.
	On specific matters raised by noble Lords, the noble Baroness, Lady Noakes, told us that she was opposed to a spending spree. I hope she is not opposed to an investment spree. That matter was raised by other noble Lords and appeared to be something that several people were interested in. My noble friend Lord Newby raised the issue of banks being thought of as utilities as far as regulation is concerned. He also referred to credit unions. It is remarkable that we are now talking about credit unions at a time when we have said goodbye to so many of those institutions called building societies. I think it is true that not a single demutualised building society is or will be shortly an independent organisation, yet we are having to reinvent a building society and call it a credit union.
	The right reverend Prelate the Bishop of Chelmsford raised the idea that, in a time of economic doubt and uncertainty, we must not forget international aid. My noble friend Lord Smith, in his inimitable contribution, referred to high pay. I was thinking that the Government have concerned themselves with low pay, with a Low Pay Commission and bringing low-pay rates. My noble friend could have gone a bit further and suggested that there should perhaps be a commission on high pay, and whether some people who are getting such high pay are worth it.
	The noble Lord, Lord Lamont, used a quaint phrase: "impairment losses". I have no idea where this phrase came from, but I think that it means "bad debt". Bad debt is there because of bad business. I am rather in favour of plain speaking.
	The noble Lord, Lord Naseby, had detailed proposals for small business, with important and useful details. The noble Lord, Lord Taylor of Warwick, raised social enterprises and ethical banking. I was delighted to hear the noble Lord, Lord Bates, refer to the north-east of England, his concerns over how Northern Rock is now being operated by the Government, and his suggestion of the enterprise economy.
	In conclusion, it is important that the Government use clear language, as is confidence in money, saving and borrowings. It is important that people can have clarity in value. I am concerned about small business and how it will go on; how, on the one hand, we are talking about small business, yet on the other we have increasingly big banking. As I indicated earlier, I hope that the Government are looking at both the local and the regional, and the variety that can be available in banking. Small business and big banking do not necessarily go together.

Lord Howard of Rising: My Lords, we on this side of the House were delighted to hear the noble Lord, Lord Myners, say this afternoon that he agreed that there should be a public inquiry into the banks, including on the leaking of information. This must include the behaviour of everyone: the bankers, the regulators and, of course, Ministers, both past and present. We hope that the Minister will be able to tell the House that this will be taken in hand as soon as possible.
	The Minister must be grateful for the intelligent and sensible comment she has heard during the debate, particularly from such distinguished Members of the House as my noble friends Lord Lawson and Lord Lamont, and my noble and learned friend Lord Howe. With their present confusion, Her Majesty's Government need all the help that they can get.
	The Government say that they do not want to control banks in which they are taking shares. With the next breath, however, they are telling banks what and what not to do. Mortgage lending must be increased to 2007 levels, as referred to by my noble friend Lord Blyth, but this level of lending was one of the elements that precipitated the present crisis. No dividends are to be paid. I hope that the Minister will reply to the comments made and questions asked by my noble friend Lord Forsyth on dividends. I warn Her Majesty's Government of the dangers of government interference, referred to by the noble Lord, Lord Powell, and my noble friend Lord Forsyth.
	I remind the Minister that President Clinton's instruction to Fannie Mae and Freddie Mac to ignore the ability to repay when making loans was one of the major creators of toxic debt. The Government want small businesses to have access to banking facilities at reasonable prices, but if the Government are asking for a 12 per cent coupon on their preference shares, what interest rate should the banks then charge small businesses? The noble Lord, Lord Bilimoria, and my noble friends Lord Courtown, Lord Naseby and Lord Forsyth, all spoke eloquently on behalf of small businesses. I hope that the Minister will listen to what they said.
	The Government are talking of borrowing to spend their way out of a crisis, but they are already borrowing imprudently and excessively. As my noble friends Lady Shephard and Lord Ryder pointed out, we are seeing the highest public borrowing since 1946, and this just to cover existing liabilities—liabilities which will inevitably increase with the decline in tax receipts and inevitable increase in social costs. Already, every month, every man, woman and child in this country is being saddled with a further £100 of government debt to add to existing liabilities. Do the Government want to burden the people of this country with even greater increases of debt? I urge the Minister to listen to, and answer, the comments and questions of my noble friend Lord Higgins. Do not hide behind the late Lord Keynes and his economic theories. As my noble friend Lady Shephard pointed out, they were for fiscally responsible Governments, not ones with massive, out-of-control borrowings. I hope that the Minister will respond to my noble friend's comments. A comment by the Minister on the remarks of my noble friend Lord Saatchi on his banking Bill would also be welcome.
	We are having this debate because of loss of confidence caused by the collapse in wholesale money markets, leading to a banking crisis. I warn the Minister to take care that there is not a similar loss of confidence in United Kingdom sovereign debt. Between 2005 and the middle of this year, three-quarters of total net UK gilts sold were purchased by overseas investors. What would happen if those investors were to disappear? Will the Government then listen to the suggestions of my noble friend Lord James?
	A clear sign that confidence is already eroding is that credit default insurance for UK government debt is now 50 per cent more expensive than that for French debt and twice as expensive as that for German debt. That is the market's independent judgment of the appalling management of this country's economy—a judgment emphasised by the performance of sterling referred to by my noble friend Lady Noakes. The world does not share the Government's view of the UK economy. With the erosion of confidence, what interest rates will have to be offered to tempt investors to buy UK government securities, and what impact will this have on UK interest rates? We must return to fiscal responsibility before there is a worse crisis and the sort of dangers mentioned by the noble Lord, Lord Burns, come to pass. That will rule out tax cuts for the time being. With government finances in the mess that they are, even one of the keenest exponents in recent times of low taxation, the late Enoch Powell, would not have recommended an unfunded reduction.
	I recommend the Minister to follow the suggestion made by my right honourable friend the shadow Chancellor for alterations within the present tax framework to assist in alleviating economic suffering. Ultimately, if fiscal responsibility is to be achieved, borrowing must be reduced. That inevitably means that spending must also be reduced. That, in turn, will create the ability to reduce taxes as a proportion of the economy, thereby increasing the resources available to the wealth-producing sector of the economy.

Baroness Vadera: My Lords, it is rare for this Chamber to have an extensive debate on the economy; but the insight of all the speakers showcases the wisdom of your Lordships' House, not least that of the three former Chancellors, six former Treasury Ministers or spokespersons, four economists and six leaders of business who have elevated this debate. It is a wisdom that should be tapped into more often, and I am very grateful to noble Lords for their contributions today.
	As we enter a very difficult time for the economy, people are worried about keeping the homes that they have worked so hard for, and businesses are worried about securing the cash flow that they need. Indeed, it is perhaps the most difficult time for the economy in any of our lifetimes, but for this the intellectual memories of Members of your Lordships' House stretch further back than in most cases, and your Lordships have something unique to contribute. It is a daunting task to conclude such a debate and, given its depth and breadth, I cannot attempt to answer every significant point. However, I should like to take head on some of the central arguments that have been made.
	First, the Opposition have appeared to suggest, as the noble Baroness, Lady Noakes, said in her opening remarks, that it is the Government's policies that have led to these challenging and extraordinary circumstances. Nothing could be further from the truth. It is important that we understand the genesis of the crisis. As the noble Lord, Lord Bilimoria, said, it is not to play political blame games but because if we misdiagnose the cause we risk misprescribing the solution. It is clear that this crisis is born of years of global financial imbalance, with large surpluses built up in countries from China and Russia to Saudi Arabia, creating excess liquidity. That has been added to by the mispricing of mortgages in the US, involving excess risk being taken by banks that are obscured and spread globally by securitisations.
	Many noble Lords have commented on the need for reform of national financial regulation. In particular, erudite comments were made by the noble Lords, Lord Newby and Lord Lawson, and my noble friend Lord Haskel. The Banking Bill, which this House will have the chance to debate, will secure new powers and deliver new processes, so we agree with the need for reform. As the noble Lord, Lord Turner, the chairman of the FSA, said, we have lessons to learn. I also argue that there is an international regulatory deficit. Banks are global and international capital flows are global, but regulation is, in the main, national, as are the regulators.
	We continue to press for essential international co-ordination, which is one of the principles for regulatory reform set out by the Prime Minister. Those principles include many of the principles that have been talked about in this House today, such as integrity with respect to conflicts of interest and responsibility with respect to remuneration tied to long-term shareholder interest, not short-term revenue generation. There should be good risk management, particularly with respect to capital adequacy and, above all, there should be transparency. Perhaps there should be a move away from Alan Greenspan, who once commented:
	"If I seem unduly clear to you, you must have misunderstood what I said".
	The need for regulatory reform, however, does not detract from the basic fact that this problem originates in the United States. Noble Lords may disagree, but I would simply point out that, for example, the UK has proportionately half the equivalent number of sub-prime loans as the United States. Indeed, we do not have, for example, like the United States, a structural long-term oversupply of housing. This is the first economic crisis of globalisation, so no one is immune, whether they are in the United States, where the crisis started, Iceland, Hungary, Indonesia or South Africa.
	The crisis has gridlocked our financial system, which is at risk of no longer being able to fulfil its purpose of oiling the wheels of real economic activity by allocating capital effectively to business and families. With that crystal-clear insight into the nature of the crisis, the Prime Minister and the Chancellor took extraordinary steps for extraordinary times, which many noble Lords supported and have spoken in support of today. Those measures have been described at some length by my noble friend Lord Myners. As a result of the leadership shown by the Prime Minister and the Chancellor, what was once unthinkable has become commonplace in many leading economies. At present, 14 economies are considering or are committed to recapitalising their banks. However, that recapitalisation, the guarantees on their funding and their access to liquidity are not, as has been portrayed, a bail out of the banks, but a first step in tackling a crisis that affects us all, because the underlying purpose is to ensure financial stability and the resumption of lending to homeowners and to businesses, especially small and medium-sized enterprises.
	Access to credit is the lifeblood of a modern economy. If one lesson was to be learnt from the 1930s, and more recently from Sweden in the 1990s, it was not to underestimate the impact of financial markets on the real economy. I am grateful in that respect for the measured comments of the noble Lord, Lord Lamont. I stress again that the banks being recapitalised by the Government have committed to maintaining over the next three years the availability and active marketing of competitively priced lending to homeowners and small businesses at 2007 levels. As the noble Lord said, it was very precise wording, which was perhaps not so precisely interpreted by the noble Lord, Lord Forsyth. It is not the same as requiring the banks to lend those amounts. Even in the 1960s, we did not micromanage such decisions. However, we will monitor the banks to ensure that they make available the capital liquidity and operational resources for them to lend at levels necessary to meet demand and market conditions. Lack of capital cannot be an excuse, and banks need to be open for business.
	We all recognise that there will be deleveraging in the global economy, but the pace, nature and manner of deleveraging will affect the fate of millions of businesses and homeowners. I say to the noble Lord, Lord Bilimoria, and other noble Lords who asked about the £4 billion in loans from the EIB, that we are in active discussions with the EIB to bring them forward to meet demand, and we are in active discussions with the banks so that they can apply for the maximum amount that they feel able to.
	On opening up access to markets, I am not yet going to say that it is game over, however many bank shares we own in the mean time. However, by rebuilding confidence and balance sheets, whether by carrot or sticks, persuasion or cajoling, financial engineering or just hammering home the point, the Prime Minister, the Chancellor and my Secretary of State have shown that we will do all that we can to ensure responsible and competitive access to credit for businesses and families. In a crisis like this, that is our job, as it is the job of any Government. For those that see no role for government in that, it is perhaps just as well that they do not aspire to be in government.
	I wish to confront a second tenet of the argument proposed by certain noble Lords, that we are not well placed historically, or relative to our competitors, to face this turbulence. The counterfactor is, of course, always hard to illustrate, but there have been points in our economic history with interesting comparators. As the noble Lord, Lord Griffiths, said, in the year before the recession of 1991, the bank rate was almost 15 per cent; today the bank rate is 4.5 per cent. Inflation reached almost 7 per cent—indeed, it slightly exceeded it; today, it just over 5 per cent. Corporate profitability was at 11.6 per cent; today, it is at 14.4 per cent. Corporates were net borrowers, equivalent to 3.9 per cent of GDP; they are now net lenders, at approximately 7 per cent of GDP.
	There has been much talk of roof repairs, but it is not just the statistics that show that the UK is well placed. The IMF said in its most recent appraisal of the UK's performance:
	"For over a decade, the United Kingdom has sustained low inflation and rapid economic growth—an exceptional achievement ... the fruit of strong policies and policy frameworks, which provide a strong foundation to weather global challenges".
	Some argue that the strength of the UK economy over the past 10 years has been the result of a debt-fuelled bubble, but debt cannot explain the improvement in the supply side of the economy, as measured by productivity performance. We have eliminated the productivity gap with Germany that we inherited and narrowed the one with France, and we are the only G7 country to have kept pace with the US's impressive productivity growth. Inch by inch, it has been long fought, hard won and structural, and it is a tribute to British workers and British companies.
	Productivity growth may not be headline-grabbing but it is the key driver of growth and prosperity, higher living standards and the basis for spending on vital public services. Our improvement in productivity underpins a one-third growth in the economy in the past 10 years, matching the US and outstripping Germany and France. Real GDP per capita has grown faster in Britain over the past decade than in any other G7 country. In the words of Paul Krugman,
	"Productivity isn't everything, but in the long run it's almost everything".
	The noble Lord, Lord Newby, commented on our dependence on financial services and the noble Lord, Lord Watson, talked about a post-industrial society, but I reiterate a point made by my noble friend Lord Haskel. A closer look at productivity illustrates another important fallacy. UK manufacturing productivity has grown by 50 per cent in the past 10 years, twice as fast as the rest of the economy. While financial services are, and will always remain, important, in fact they represent a smaller proportion of GDP than manufacturing. The perceived dominance of financial services fails to acknowledge less recognised leadership in other sectors, such as creative industries and pharmaceuticals. We are second only to the United States in aerospace; we are home to Europe's electronic design; and indeed we have its largest ICT industry. We have always said that our future lies in a mixed and balanced economy.
	The third tenet that I should like to discuss is the notion that the use of fiscal policy is the equivalent of fiscal irresponsibility. I remember very well the Mais lecture of the noble Lord, Lord Lawson, because it occurred in the first year of my professional life, so I say this with much humility. We were reminded of his central argument by the shadow Chancellor last week, when he said that it was the job of monetary policy, not fiscal policy, to manage the economy. It is of course well recognised that monetary policy is the primary and more flexible instrument to manage an economy. However, we are very well aware from their actions that the previous Government did not regard fiscal policy as an appropriate instrument to use, even in a downturn. They actually tightened fiscal policy during the recession of the early 1980s. This, along with inappropriately tight monetary policy, made that recession one of the deepest in living memory.
	This Government will not repeat the mistakes that were made. The discipline that we have imposed on the public finances means that net debt is low by both international and historic standards. That provides us with the flexibility to support the economy in the face of these current shocks. It means that we can allow borrowing to rise this year to support families and businesses and, in particular, we can allow the automatic stabilisers to operate and smooth the path of the economy in the short term.
	Instead of the somewhat unrecognisable accusations that I have heard of "spend, spend, spend", perhaps I may note that the Chancellor talked about,
	"switching our spending priorities to areas that make a difference".
	Indeed, in his recent Mais lecture, he said that fiscal policy should be supportive of monetary policy. We will choose the path not of irresponsible spending nor of irresponsible fiscal tightening but of the responsible use of all levers to support our economy. We will, of course, continue to focus on the main tasks at hand, taking decisive action on comprehensive measures to ensure financial stability; to work to ensure access to credit, especially for small and medium-sized enterprises; to show global leadership for both international financial reform and co-ordinated action on downturn; and to fight protectionism. We will also help individuals facing redundancy to equip them for their next job; we will help families facing repossessions through accelerated interest servicing help; and we will maintain competitiveness for the future, a future which we face with huge opportunities for the doubling of global output over the next decades and a billion new jobs which could be created through globalisation.
	We cannot be complacent about the exceptional and unprecedented tests which face each and every one of us in the coming months. As parliamentarians, we must be neither doom-mongers, nor complacent, but confident in Britain's ability to emerge strong from these challenges—however tough—and our ability as a House to lead— however difficult.

Lord Forsyth of Drumlean: My Lords, would the Minister deal with the specific questions which I asked her about the bail-out: why the Government are insisting on the position that they have taken on dividend policy and the reasons for setting a coupon at 12 per cent? She has also not dealt with a number of other specific questions put by my noble friends.

Baroness Vadera: My Lords, I have not dealt with a number of questions. I would be very happy to answer them. On dividends, we have made it clear, as was made clear on the night and in the agreements, that it is perfectly possible for the banks to pay dividends, except in the first year. I point out that Barclays has also declared that it will not be paying a dividend, regardless of the fact that it did not come to us. Dividends can be paid when our preference shares are repaid. I have no apology to make for protecting taxpayers.
	The 12 per cent coupon is reasonably competitively priced. If one looks at the Swiss banks and at the detail of the whole package of terms, for example, on the Dutch deal to which the noble Lord referred, there is a step up in the coupon on the preference shares over a period of time. Many factors go into the overall package. I do not believe that, as shareholders in the ordinary equity ourselves, the Treasury would have taken an imbalanced view of both the value of the shares that we will own and protecting the taxpayers in preference shares.

On Question, Motion agreed to.
	House adjourned at 9.58 pm.